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EX-32 - EXHIBIT 32 - ASSOCIATED BANC-CORPasb63016ex32.htm
EX-31.2 - EXHIBIT 31.2 - ASSOCIATED BANC-CORPasb063016ex312.htm
EX-31.1 - EXHIBIT 31.1 - ASSOCIATED BANC-CORPasb063016ex311.htm
EX-3 - EXHIBIT 3 - ASSOCIATED BANC-CORPasb063016ex3.htm





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

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended June 30, 2016
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to 
 

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

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

(920) 491-7500
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  þ        No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  þ        No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ
Accelerated filer  ¨
 
 
Non-accelerated filer  ¨
Smaller reporting company ¨ 
(Do not check if a smaller reporting company)
 

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of registrant’s common stock, par value $0.01 per share, at July 27, 2016, was 150,424,042.



1




ASSOCIATED BANC-CORP
TABLE OF CONTENTS

2




PART I - FINANCIAL INFORMATION
ITEM 1.
Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
 
June 30, 2016
 
December 31, 2015
 
(Unaudited)
 
(Audited)
 
(In Thousands, except share and per share data)
ASSETS
 
 
 
Cash and due from banks
$
333,000

 
$
374,921

Interest-bearing deposits in other financial institutions
131,680

 
79,764

Federal funds sold and securities purchased under agreements to resell
13,200

 
19,000

Investment securities held to maturity, at amortized cost
1,236,140

 
1,168,230

Investment securities available for sale, at fair value
4,801,766

 
4,967,414

Federal Home Loan Bank and Federal Reserve Bank stocks, at cost
194,501

 
147,240

Loans held for sale
284,376

 
124,915

Loans
19,815,286

 
18,714,343

Allowance for loan losses
(267,780
)
 
(274,264
)
Loans, net
19,547,506

 
18,440,079

Premises and equipment, net
331,427

 
267,606

Goodwill
971,951

 
968,844

Mortgage servicing rights, net
57,474

 
61,341

Other intangible assets, net
16,427

 
16,458

Trading assets
77,112

 
32,192

Other assets
1,042,139

 
1,043,831

Total assets
$
29,038,699

 
$
27,711,835

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Noninterest-bearing demand deposits
$
5,039,336

 
$
5,562,466

Interest-bearing deposits
15,253,514

 
15,445,199

Total deposits
20,292,850

 
21,007,665

Federal funds purchased and securities sold under agreements to repurchase
509,150

 
431,438

Other short-term funding
1,402,407

 
402,978

Long-term funding
3,511,475

 
2,676,164

Trading liabilities
79,466

 
33,430

Accrued expenses and other liabilities
213,204

 
222,914

Total liabilities
26,008,552

 
24,774,589

Stockholders’ equity
 
 
 
Preferred equity
120,201

 
121,379

Common equity:
 
 
 
Common stock
1,630

 
1,642

Surplus
1,453,285

 
1,458,522

Retained earnings
1,629,915

 
1,593,239

Accumulated other comprehensive income (loss)
13,453

 
(32,616
)
Treasury stock, at cost
(188,337
)
 
(204,920
)
Total common equity
2,909,946

 
2,815,867

Total stockholders’ equity
3,030,147

 
2,937,246

Total liabilities and stockholders’ equity
$
29,038,699

 
$
27,711,835

Preferred shares issued
123,904

 
125,114

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

 
750,000

Common shares issued
163,030,209

 
164,200,068

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

 
250,000,000

Treasury shares of common stock
11,993,727

 
12,960,636

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,
 
2016
 
2015
 
2016
 
2015
 
(In Thousands, except per share data)
INTEREST INCOME
 
 
 
 
 
Interest and fees on loans
$
163,059

 
$
152,417

 
$
322,715

 
$
304,362

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
24,270

 
23,868

 
49,786

 
48,960

Tax-exempt
7,894

 
7,565

 
15,724

 
15,452

Other interest
1,318

 
1,771

 
2,385

 
3,463

Total interest income
196,541

 
185,621

 
390,610

 
372,237

INTEREST EXPENSE
 
 
 
 
 
 
 
Interest on deposits
11,678

 
8,141

 
23,444

 
15,760

Interest on Federal funds purchased and securities sold under agreements to repurchase
378

 
235

 
674

 
466

Interest on other short-term funding
845

 
115

 
1,360

 
196

Interest on long-term funding
6,923

 
10,642

 
16,428

 
21,514

Total interest expense
19,824

 
19,133

 
41,906

 
37,936

NET INTEREST INCOME
176,717

 
166,488

 
348,704

 
334,301

Provision for credit losses
14,000

 
5,000

 
34,000

 
9,500

Net interest income after provision for credit losses
162,717

 
161,488

 
314,704

 
324,801

NONINTEREST INCOME
 
 
 
 
 
 
 
Trust service fees
11,509

 
12,515

 
22,956

 
24,602

Service charges on deposit accounts
16,444

 
15,703

 
32,717

 
31,509

Card-based and other nondeposit fees
12,717

 
13,597

 
24,708

 
26,013

Insurance commissions
22,005

 
20,077

 
43,387

 
39,805

Brokerage and annuity commissions
4,098

 
4,192

 
7,892

 
7,875

Mortgage banking, net
4,067

 
9,941

 
8,271

 
17,349

Capital market fees, net
3,793

 
2,692

 
7,331

 
5,159

Bank owned life insurance income
2,973

 
2,381

 
7,743

 
5,256

Asset gains (losses), net
(343
)
 
1,854

 
181

 
2,687

Investment securities gains, net
3,116

 
1,242

 
6,214

 
1,242

Other
1,789

 
2,288

 
3,960

 
4,798

Total noninterest income
82,168

 
86,482

 
165,360

 
166,295

NONINTEREST EXPENSE
 
 
 
 
 
 
 
Personnel expense
102,129

 
102,986

 
203,527

 
203,138

Occupancy
13,215

 
14,308

 
27,017

 
31,991

Equipment
5,396

 
5,739

 
10,842

 
11,511

Technology
14,450

 
16,354

 
28,714

 
31,912

Business development and advertising
6,591

 
6,829

 
14,802

 
12,156

Other intangible amortization
539

 
888

 
1,043

 
1,689

Loan expense
3,442

 
3,681

 
6,663

 
6,677

Legal and professional fees
4,856

 
4,344

 
9,881

 
8,882

Foreclosure / OREO expense, net
1,330

 
1,264

 
3,207

 
2,426

FDIC expense
8,750

 
6,000

 
16,500

 
12,500

Other
13,662

 
14,384

 
26,135

 
27,887

Total noninterest expense
174,360

 
176,777

 
348,331

 
350,769

Income before income taxes
70,525

 
71,193

 
131,733

 
140,327

Income tax expense
21,434

 
21,793

 
40,108

 
44,255

Net income
49,091

 
49,400

 
91,625

 
96,072

Preferred stock dividends
2,169

 
1,545

 
4,367

 
2,773

Net income available to common equity
$
46,922

 
$
47,855

 
$
87,258

 
$
93,299

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.31

 
$
0.32

 
$
0.58

 
$
0.62

Diluted
$
0.31

 
$
0.31

 
$
0.58

 
$
0.61

Average common shares outstanding:
 
 
 
 
 
 
 
Basic
148,511

 
149,903

 
148,556

 
149,986

Diluted
149,530

 
151,108

 
149,518

 
151,129


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,
 
2016
 
2015
 
2016
 
2015
 
($ in Thousands)
Net income
$
49,091

 
$
49,400

 
$
91,625

 
$
96,072

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
Net unrealized gains (losses)
22,321

 
(35,224
)
 
82,743

 
12,194

Amortization of net unrealized gains on available for sale securities transferred to held to maturity securities
(1,452
)
 

 
(3,024
)
 

Reclassification adjustment for net gains realized in net income
(3,116
)
 
(1,242
)
 
(6,214
)
 
(1,242
)
Income tax (expense) benefit
(6,773
)
 
13,923

 
(28,048
)
 
(4,182
)
Other comprehensive income (loss) on investment securities available for sale
10,980

 
(22,543
)
 
45,457

 
6,770

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

 
12

 
25

 
25

Amortization of actuarial losses
483

 
533

 
965

 
1,065

Income tax expense
(189
)
 
(208
)
 
(378
)
 
(416
)
Other comprehensive income on pension and postretirement obligations
306

 
337

 
612

 
674

Total other comprehensive income (loss)
11,286

 
(22,206
)
 
46,069

 
7,444

Comprehensive income
$
60,377

 
$
27,194

 
$
137,694

 
$
103,516


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, 2014
$
59,727

 
$
1,665

 
$
1,484,933

 
$
1,497,818

 
$
(4,850
)
 
$
(239,042
)
 
$
2,800,251

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
96,072

 

 

 
96,072

Other comprehensive income

 

 

 

 
7,444

 

 
7,444

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
103,516

Common stock issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation plans, net

 

 
2,051

 
(21,145
)
 

 
32,798

 
13,704

Acquisition of Ahmann & Martin Co.

 
26

 
43,504

 

 

 

 
43,530

Purchase of common stock returned to authorized but unissued

 
(49
)
 
(92,951
)
 

 

 

 
(93,000
)
Purchase of treasury stock

 

 

 

 

 
(4,500
)
 
(4,500
)
Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.20 per share

 

 

 
(30,508
)
 

 

 
(30,508
)
Preferred stock

 

 

 
(2,773
)
 

 

 
(2,773
)
Issuance of preferred stock
62,966

 

 

 

 

 

 
62,966

Purchase of preferred stock
(678
)
 

 

 
(74
)
 

 

 
(752
)
Other

 

 

 
(706
)
 

 

 
(706
)
Stock-based compensation expense, net

 

 
10,879

 

 

 

 
10,879

Tax benefit of stock-based compensation

 

 
1,784

 

 

 

 
1,784

Balance, June 30, 2015
$
122,015

 
$
1,642

 
$
1,450,200

 
$
1,538,684

 
$
2,594

 
$
(210,744
)
 
$
2,904,391

Balance, December 31, 2015
$
121,379

 
$
1,642

 
$
1,458,522

 
$
1,593,239

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

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
91,625

 

 

 
91,625

Other comprehensive income

 

 

 

 
46,069

 

 
46,069

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
137,694

Common stock issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation plans, net

 

 
1,153

 
(17,478
)
 

 
20,601

 
4,276

Purchase of common stock returned to authorized but unissued

 
(12
)
 
(19,995
)
 

 

 

 
(20,007
)
Purchase of treasury stock

 

 

 

 

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

 

 

 
(33,034
)
 

 

 
(33,034
)
Preferred stock

 

 

 
(4,367
)
 

 

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

 

 
(70
)
 

 

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

 

 
13,210

 

 

 

 
13,210

Tax benefit of stock-based compensation

 

 
395

 

 

 

 
395

Balance, June 30, 2016
$
120,201

 
$
1,630

 
$
1,453,285

 
$
1,629,915

 
$
13,453

 
$
(188,337
)
 
$
3,030,147

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,
 
2016
 
2015
 
($ in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
91,625

 
$
96,072

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
    Provision for credit losses
34,000

 
9,500

    Depreciation and amortization
22,914

 
24,232

    Addition to (recovery of) valuation allowance on mortgage servicing rights, net
2,120

 
(465
)
    Amortization of mortgage servicing rights
5,896

 
6,147

    Amortization of other intangible assets
1,043

 
1,689

    Amortization and accretion on earning assets, funding, and other, net
22,045

 
19,457

    Tax benefit of stock based compensation
395

 
1,784

    Gain on sales of investment securities, net
(6,214
)
 
(1,242
)
    Gain on sales of assets and impairment write-downs, net
(181
)
 
(2,687
)
    Gain on mortgage banking activities, net
(7,058
)
 
(8,000
)
    Mortgage loans originated and acquired for sale
(517,838
)
 
(619,202
)
    Proceeds from sales of mortgage loans held for sale
491,980

 
599,262

    (Increase) decrease in interest receivable
(4,875
)
 
808

    Increase (decrease) in interest payable
(4,739
)
 
5,596

    Net change in other assets and other liabilities
(25,836
)
 
(33,825
)
Net cash provided by operating activities
105,277

 
99,126

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Net increase in loans
(1,281,291
)
 
(703,636
)
Purchases of:
 
 
 
Available for sale securities
(495,453
)
 
(1,702,678
)
  Held to maturity securities
(112,226
)
 
(133,976
)
Federal Home Loan Bank and Federal Reserve Bank stocks
(67,261
)
 
(14,172
)
  Premises, equipment, and software, net of disposals
(81,461
)
 
(26,232
)
  Other assets
(3,073
)
 
(8,183
)
Proceeds from:
 
 
 
  Sales of available for sale securities
359,484

 
1,065,328

  Sales of Federal Home Loan Bank stock
20,000

 
42,514

  Prepayments, calls, and maturities of available for sale investment securities
371,440

 
620,320

  Prepayments, calls, and maturities of held to maturity investment securities
37,172

 
6,290

  Sales, prepayments, calls, and maturities of other assets
13,362

 
10,465

  Net cash (paid) received in acquisition
(685
)
 
1,132

Net cash used in investing activities
(1,239,992
)

(842,828
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in deposits
(714,815
)
 
506,059

Net increase in short-term funding
1,077,141

 
527,248

Repayment of long-term funding
(430,018
)
 
(1,000,017
)
Proceeds from issuance of long-term funding
1,265,000

 
250,000

Proceeds from issuance of common stock for stock-based compensation plans
4,276

 
13,704

Proceeds from issuance of preferred stock

 
62,966

Purchase of preferred stock
(1,248
)
 
(752
)
Purchase of common stock returned to authorized but unissued
(20,007
)
 
(93,000
)
Purchase of treasury stock
(4,018
)
 
(4,500
)
Cash dividends on common stock
(33,034
)
 
(30,508
)
Cash dividends on preferred stock
(4,367
)
 
(2,773
)
Net cash provided by financing activities
1,138,910

 
228,427

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

 
(515,275
)
Cash and cash equivalents at beginning of period
473,685

 
1,032,067

Cash and cash equivalents at end of period
$
477,880

 
$
516,792

Supplemental disclosures of cash flow information:
 
 
 
   Cash paid for interest
$
46,316

 
$
32,123

   Cash paid for income taxes
27,852

 
40,473

   Loans and bank premises transferred to other real estate owned
4,704

 
3,117

   Capitalized mortgage servicing rights
4,149

 
6,729

Loans transferred into held for sale from portfolio, net
130,694

 

Acquisition:
 
 
 
   Fair value of assets acquired, including cash and cash equivalents
522

 
4,590

   Fair value ascribed to goodwill and intangible assets
4,119

 
51,791

   Fair value of liabilities assumed
1,423

 
12,851

   Common stock issued in acquisition

 
43,530

See accompanying notes to consolidated financial statements.

7



Item 1. Financial Statements Continued:

ASSOCIATED BANC-CORP
Notes to Consolidated Financial Statements

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with U.S. generally accepted accounting principles have been omitted or abbreviated. The information contained in the consolidated financial statements and footnotes in the Corporation's 2015 Annual Report on Form 10-K, should be referred to in connection with the reading of these unaudited interim financial statements.
Note 1 Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and comprehensive income, changes in stockholders’ equity, and cash flows of Associated Banc-Corp (individually referred to herein as the “Parent Company,” and together with all of its subsidiaries and affiliates, collectively referred to herein as the “Corporation”) for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses, goodwill impairment assessment, mortgage servicing rights valuation, and income taxes. Management has evaluated subsequent events for potential recognition or disclosure.
Note 2 Acquisitions
On February 17, 2015, the Corporation acquired Ahmann & Martin Co., a risk and employee benefits consulting firm based in Minnesota. The firm merged into Associated Financial Group, LLC (AFG), the Corporation's insurance brokerage subsidiary. The Corporation's acquisition of Ahmann & Martin Co. enhanced the Corporation's ability to offer clients unique, comprehensive solutions to meet their insurance and financial risk management needs. The transaction was valued at approximately $48 million with the opportunity to increase the consideration by $8 million should certain contingencies be met over a defined period.
The transaction was accounted for using the acquisition method of accounting and as such, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair value on the acquisition date. Goodwill from the acquisition represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes. As a result of the acquisition, the Corporation recorded goodwill of approximately $40 million and other intangible assets of approximately $12 million. Goodwill was assigned to the Corporation's Community, Consumer, and Business segment. See Note 8 for additional information on goodwill and other intangible assets.
During the first quarter of 2016, the Corporation completed two small insurance acquisitions to complement its existing insurance and benefits related products and services provided by Associated Financial Group, LLC. The Corporation recorded goodwill of $3 million and other intangibles of $1 million related to these insurance acquisitions.
During the second quarter of 2016, Associated Banc-Corp announced that it has begun rebranding AFG. The rebranding follows the February 2015 acquisition of Ahmann & Martin Co. and two small insurance acquisitions during the first quarter of 2016. Going forward, as the requisite processes are completed in various states, AFG will be doing business as Associated Benefits and Risk Consulting (ABRC).
Note 3 New Accounting Pronouncements Adopted
In September 2015, the FASB issued an amendment to simplify the accounting for measurement adjustments to prior business combinations. The amendment requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer must record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendment also requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This amendment was effective for fiscal

8



years beginning after December 15, 2015, including interim periods within those fiscal years. The Corporation adopted the accounting standard during the first quarter of 2016, as required, and with no material impact on its results of operations, financial position, or liquidity.
In May 2015, the FASB issued an amendment to eliminate the requirement to categorize investments measured using the net asset value per share ("NAV") practical expedient in the fair value hierarchy table. Entities are required to disclose the fair value of investments measured using the NAV practical expedient so that financial statement users can reconcile amounts reported in the fair value hierarchy table to amounts reported on the balance sheet. This amendment required retrospective application and was effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Corporation adopted the accounting standard during the first quarter of 2016, as required, with no material impact on its results of operations, financial position, or liquidity.
In April 2015, the FASB issued an amendment to provide guidance to customers about whether a cloud computing arrangement included a software license. If the cloud computing arrangement includes a software license, then the customer should account for the software license element consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This amendment was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Corporation adopted the accounting standard on a prospective basis during the first quarter of 2016, as required, and with no material impact on its results of operations, financial position, or liquidity.
In April 2015, the FASB issued an amendment to simplify the presentation of debt issuance costs. This amendment requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB expanded this amendment to include SEC staff views related to debt issuance costs associated with line-of-credit arrangements. The SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This amendment required retrospective application and was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Corporation adopted the accounting standard during the first quarter of 2016. All prior periods have been restated to reflect this change in presentation, resulting in a $3 million reduction to other assets and a corresponding $3 million reduction to long-term funding on the balance sheet compared to the amounts originally reported at December 31, 2015.
In February 2015, the FASB issued an amendment to modify existing consolidation guidance for reporting companies that are required to evaluate whether they should consolidate legal entities. The new standard will place more emphasis on risk of loss when determining a controlling financial interest. Frequency in the application of related-party guidance for determining a controlling financial interest will be reduced. Also, consolidation conclusions for public and private companies among several industries that make use of limited partnerships or VIEs will be changed. This amendment was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Corporation adopted the accounting standard during the first quarter of 2016, as required, and with no material impact on its results of operations, financial position, or liquidity.
In January 2015, the FASB issued an amendment to eliminate from U.S. GAAP the concept of extraordinary items. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The amended guidance prohibits separate disclosure of extraordinary items in the income statement. This amendment was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Corporation adopted the accounting standard during the first quarter of 2016, as required, with no material impact.
In June 2014, the FASB issued an amendment to the stock compensation accounting guidance to clarify that a performance target that affects vesting of a share-based payment and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This amendment was effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2015. The Corporation adopted the accounting standard on a prospective basis during the first quarter of 2016, as required, with no material impact on its results of operations, financial position, or liquidity.

9



Note 4 Earnings Per Common Share
Earnings per common share are calculated utilizing the two-class method. Basic earnings per common share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per common share are calculated by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding adjusted for the dilutive effect of common stock awards (outstanding stock options, unvested restricted stock awards, and outstanding 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,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share data)
Net income
$
49,091

 
$
49,400

 
$
91,625

 
$
96,072

Preferred stock dividends
(2,169
)
 
(1,545
)
 
(4,367
)
 
(2,773
)
Net income available to common equity
$
46,922

 
$
47,855

 
$
87,258

 
$
93,299

Common shareholder dividends
$
(16,443
)
 
$
(15,056
)
 
$
(32,646
)
 
$
(30,222
)
Unvested share-based payment awards
(182
)
 
(172
)
 
(388
)
 
(286
)
Undistributed earnings
$
30,297

 
$
32,627

 
$
54,224

 
$
62,791

Undistributed earnings allocated to common shareholders
$
29,963

 
$
32,262

 
$
53,649

 
$
62,148

Undistributed earnings allocated to unvested share-based payment awards
334

 
365

 
575

 
643

Undistributed earnings
$
30,297

 
$
32,627

 
$
54,224

 
$
62,791

Basic
 
 
 
 
 
 
 
Distributed earnings to common shareholders
$
16,443

 
$
15,056

 
$
32,646

 
$
30,222

Undistributed earnings allocated to common shareholders
29,963

 
32,262

 
53,649

 
62,148

Total common shareholders earnings, basic
$
46,406

 
$
47,318

 
$
86,295

 
$
92,370

Diluted
 
 
 
 
 
 
 
Distributed earnings to common shareholders
$
16,443

 
$
15,056

 
$
32,646

 
$
30,222

Undistributed earnings allocated to common shareholders
29,963

 
32,262

 
53,649

 
62,148

Total common shareholders earnings, diluted
$
46,406

 
$
47,318

 
$
86,295

 
$
92,370

Weighted average common shares outstanding
148,511

 
149,903

 
148,556

 
149,986

Effect of dilutive common stock awards
1,019

 
1,205

 
962

 
1,143

Diluted weighted average common shares outstanding
149,530

 
151,108

 
149,518

 
151,129

Basic earnings per common share
$
0.31

 
$
0.32

 
$
0.58

 
$
0.62

Diluted earnings per common share
$
0.31

 
$
0.31

 
$
0.58

 
$
0.61

Options to purchase approximately 1 million and 2 million shares were outstanding for the three and six months ended June 30, 2016, respectively, and 1 million shares were outstanding for the three and six months ended June 30, 2015, respectively, but excluded from the calculation of diluted earnings per common share as the effect would have been anti-dilutive. Warrants to purchase approximately 4 million shares were outstanding for both the three and six months ended June 30, 2016 and 2015, respectively, but excluded from the calculation of diluted earnings per common shares as the effect would have been anti-dilutive.
Note 5 Stock-Based Compensation
Stock-Based Compensation Plan:
In March 2013, the Board of Directors, with subsequent approval of the Corporation’s shareholders, approved the adoption of the 2013 Incentive Compensation Plan (“2013 Plan”). Under the 2013 Plan, options are generally exercisable up to 10 years from the date of grant, have an exercise price that is equal to the closing price of the Corporation’s stock on the grant date, and vest ratably over four years. The 2013 Plan also provides for the issuance of restricted common stock and restricted common stock units to certain key employees (collectively referred to as “restricted stock awards”). The shares of restricted stock are restricted as to transfer, but are not restricted as to dividend payment or voting rights. Restricted stock units receive dividend equivalents but do not have voting rights. The transfer restrictions lapse over three or four years, depending upon whether the awards are service-based or performance-based. Service-based awards are contingent upon continued employment or meeting the requirements for retirement, and performance-based awards are based on earnings per share performance goals, relative total shareholder return, and continued employment or meeting the requirements for retirement. The 2013 Plan provides that restricted stock awards and

10



stock options will immediately become fully vested upon retirement from the Corporation of those colleagues whose retirement meets the early retirement or normal retirement definitions under the plan (“retirement eligible colleagues”).
Accounting for Stock-Based Compensation:
The fair value of stock options granted is estimated on the date of grant using a Black-Scholes option pricing model, while the fair value of restricted stock awards is their fair market value on the date of grant. The fair values of stock options and restricted stock awards are amortized as compensation expense on a straight-line basis over the vesting period of the grants. For retirement eligible colleagues, expenses related to stock options and restricted stock awards are fully recognized on the date the colleague meets the definition of normal or early retirement. Compensation expense recognized is included in personnel expense in the consolidated statements of income.
Assumptions are used in estimating the fair value of stock options granted. The weighted average expected life of the stock option represents the period of time that stock options are expected to be outstanding and is estimated using historical data of stock option exercises and forfeitures. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the implied volatility of the Corporation’s stock. The following assumptions were used in estimating the fair value for options granted in the first six months of 2016 and full year 2015.
 
2016
 
2015
Dividend yield
2.50
%
 
2.00
%
Risk-free interest rate
2.00
%
 
2.00
%
Weighted average expected volatility
25.00
%
 
20.00
%
Weighted average expected life
5.5 years

 
6.0 years

Weighted average per share fair value of options
$3.36
 
$3.08
The Corporation is required to estimate potential forfeitures of stock grants and adjust compensation expense recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized in the period of change and will also impact the amount of stock-based compensation expense to be recognized in future periods.
A summary of the Corporation’s stock option activity for the year ended December 31, 2015, and the six months ended June 30, 2016 is presented below.
Stock Options
Shares
 
Weighted Average
Exercise Price
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value (000s)
Outstanding at December 31, 2014
7,847,338

 
$
18.34

 
 
 
 
Granted
1,348,504

 
17.95

 
 
 
 
Exercised
(1,351,646
)
 
13.90

 
 
 
 
Forfeited or expired
(1,215,053
)
 
29.13

 
 
 
 
Outstanding at December 31, 2015
6,629,143

 
$
17.22

 
6.24
 
$
18,730

Options Exercisable at December 31, 2015
4,190,245

 
$
17.25

 
4.93
 
$
14,873

Granted
1,302,298

 
$
17.45

 
 
 
 
Exercised
(230,327
)
 
13.69

 
 
 
 
Forfeited or expired
(117,457
)
 
22.25

 
 
 
 
Outstanding at June 30, 2016
7,583,657

 
$
17.30

 
6.43
 
$
10,047

Options Exercisable at June 30, 2016
4,721,196

 
$
17.21

 
4.98
 
$
9,633

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, 2016, the intrinsic value of stock options exercised was approximately $1 million. For the year ended December 31, 2015 the intrinsic value of the stock options exercised was $7 million. The total fair value of stock options that vested were $3 million and $6 million, respectively, for the six months ended June 30, 2016 and for the year ended December 31, 2015. The Corporation recognized compensation expense for the vesting of stock options of $2 million and $4 million for the six months ended June 30, 2016 and year ended December 31, 2015, respectively. Included in compensation expense for the six months ended June 30, 2016 was approximately $915,000 of expense for the accelerated vesting of stock options granted to retirement eligible colleagues. At June 30, 2016, the Corporation had $6 million of unrecognized compensation expense related to stock options that is expected to be recognized over the remaining requisite service periods that extend predominantly through the fourth quarter 2019.

11



The following table summarizes information about the Corporation’s restricted stock activity for the year ended December 31, 2015, and for the six months ended June 30, 2016.
Restricted Stock
Shares
 
Weighted Average Grant Date Fair Value
Outstanding at December 31, 2014
1,982,126

 
$
15.79

Granted
1,173,847

 
18.09

Vested
(709,582
)
 
15.62

Forfeited
(196,363
)
 
16.87

Outstanding at December 31, 2015
2,250,028

 
$
17.03

Granted
1,054,923

 
$
17.45

Vested
(795,003
)
 
16.55

Forfeited
(58,802
)
 
17.64

Outstanding at June 30, 2016
2,451,146

 
$
17.34

The Corporation amortizes the expense related to restricted stock awards as compensation expense over the vesting period specified in the grant. Performance-based restricted stock awards granted during 2015 and 2016 will vest ratably over a three year period, while service-based restricted stock awards granted during 2015 and 2016 will vest ratably over a four year period. Expense for restricted stock awards of approximately $11 million and $15 million was recorded for the six months ended June 30, 2016 and year ended December 31, 2015, respectively. Included in compensation expense for 2016 was approximately $3 million of expense for the accelerated vesting of restricted stock awards granted to retirement eligible colleagues. The Corporation had $28 million of unrecognized compensation costs related to restricted stock awards at June 30, 2016, that is expected to be recognized over the remaining requisite service periods that extend predominantly through fourth quarter 2019.
The Corporation has the ability to issue shares from treasury or new shares upon the exercise of stock options or the granting of restricted stock awards. The Board of Directors has authorized management to repurchase shares of the Corporation’s common stock each quarter in the market, to be made available for issuance in connection with the Corporation’s employee incentive plans and for other corporate purposes. The repurchase of shares will be based on market 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.

12



Note 6 Investment Securities
Investment securities are generally classified as available for sale or held to maturity at the time of purchase. The majority of the Corporation's investment securities are mortgage-related securities issued by the Government National Mortgage Association (“GNMA”) or government-sponsored enterprises ("GSE") such as the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”). The amortized cost and fair values of securities available for sale and held to maturity were as follows.
 
June 30, 2016
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
 
($ in Thousands)
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
U. S. Treasury securities
$
1,000

 
$
1

 
$

 
$
1,001

 
Residential mortgage-related securities:
 
 
 
 
 
 
 
 
FNMA / FHLMC
956,834

 
33,545

 

 
990,379

 
GNMA
1,654,218

 
23,028

 

 
1,677,246

 
Private-label
1,429

 

 
(19
)
 
1,410

 
GNMA commercial mortgage-related securities
2,124,491

 
9,912

 
(7,482
)
 
2,126,921

 
Other securities (debt and equity)
4,718

 
91

 

 
4,809

 
Total investment securities available for sale
$
4,742,690

 
$
66,577

 
$
(7,501
)
 
$
4,801,766

 
Investment securities held to maturity:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions (municipal securities)
$
1,111,868

 
$
40,280

 
$
(15
)
 
$
1,152,133

 
Residential mortgage-related securities:
 
 
 
 
 
 
 
 
FNMA / FHLMC
39,019

 
977

 
(32
)
 
39,964

 
GNMA
85,253

 
1,510

 
(5
)
 
86,758

 
Total investment securities held to maturity
$
1,236,140

 
$
42,767

 
$
(52
)
 
$
1,278,855

 
December 31, 2015
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
 
($ in Thousands)
 
Investment securities available for sale:
 
 
 
 
 
 
 
 
U. S. Treasury securities
$
999

 
$

 
$
(2
)
 
$
997

 
Residential mortgage-related securities:
 
 
 
 
 
 
 
 
FNMA / FHLMC
1,388,995

 
33,791

 
(8,160
)
 
1,414,626

 
GNMA
1,605,956

 
507

 
(16,460
)
 
1,590,003

 
Private-label
1,722

 
1

 
(14
)
 
1,709

 
GNMA commercial mortgage-related securities
1,982,477

 
1,334

 
(28,501
)
 
1,955,310

 
Other securities (debt and equity)
4,718

 
51

 

 
4,769

 
Total investment securities available for sale
$
4,984,867

 
$
35,684

 
$
(53,137
)
 
$
4,967,414

 
Investment securities held to maturity:
 
 
 
 
 
 
 
 
Municipal securities
$
1,043,767

 
$
16,803

 
$
(339
)
 
$
1,060,231

 
Residential mortgage-related securities:
 
 
 
 
 
 
 
 
FNMA / FHLMC
41,469

 
513

 
(645
)
 
41,337

 
GNMA
82,994

 
189

 
(309
)
 
82,874

 
Total investment securities held to maturity
$
1,168,230

 
$
17,505

 
$
(1,293
)
 
$
1,184,442


13



The amortized cost and fair values of investment securities available for sale and held to maturity at June 30, 2016, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Available for Sale
 
Held to Maturity
($ in Thousands)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
4,500

 
$
4,538

 
$
38,985

 
$
25,846

Due after one year through five years
1,200

 
1,200

 
252,762

 
265,059

Due after five years through ten years

 

 
231,798

 
242,887

Due after ten years

 

 
588,323

 
618,341

Total debt securities
5,700

 
5,738

 
1,111,868

 
1,152,133

Residential mortgage-related securities:
 
 
 
 
 
 
 
FNMA / FHLMC
956,834

 
990,379

 
39,019

 
39,964

GNMA
1,654,218

 
1,677,246

 
85,253

 
86,758

Private-label
1,429

 
1,410

 

 

GNMA commercial mortgage-related securities
2,124,491

 
2,126,921

 

 

Equity securities
18

 
72

 

 

Total investment securities
$
4,742,690

 
$
4,801,766

 
$
1,236,140

 
$
1,278,855

Ratio of Fair Value to Amortized Cost
 
 
101.2
%
 
 
 
103.5
%
During the first half of 2016, the Corporation sold approximately $359 million of FNMA and FHLMC mortgage-related securities and reinvested into GNMA mortgage-related securities, generating a $6 million net gain on sale. This sale of FNMA and FHLMC mortgage-related securities and the subsequent purchase of GNMA mortgage-related securities lowered risk weighted assets and related capital requirements.
 
Six Months Ended June 30,
 
2016
 
2015
 
($ in Thousands)
Gross gains
$
6,403

 
$
5,251

Gross losses
(189
)
 
(4,009
)
Investment securities gains, net
$
6,214

 
$
1,242

Proceeds from sales of investment securities
$
359,484

 
$
1,065,328

Securities with a carrying value of approximately $2.5 billion and $3.2 billion at June 30, 2016, and December 31, 2015, respectively, 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, 2016.
 
Less than 12 months
 
12 months or more
 
Total
June 30, 2016
Number
of
Securities
 
Unrealized
Losses
 
Fair
Value
 
Number
of
Securities
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
($ in Thousands)
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private-label

 
$

 
$

 
4

 
$
(19
)
 
$
1,362

 
$
(19
)
 
$
1,362

GNMA commercial mortgage-related securities
5

 
(158
)
 
150,308

 
21

 
(7,324
)
 
475,595

 
(7,482
)
 
625,903

Total
5

 
$
(158
)
 
$
150,308

 
25

 
$
(7,343
)
 
$
476,957

 
$
(7,501
)
 
$
627,265

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
1

 
$
(1
)
 
$
511

 
6

 
$
(14
)
 
$
2,184

 
$
(15
)
 
$
2,695

Residential mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC

 

 

 
2

 
(32
)
 
9,173

 
(32
)
 
9,173

GNMA
1

 
(5
)
 
1,493

 

 

 

 
(5
)
 
1,493

Total
2

 
$
(6
)
 
$
2,004

 
8

 
$
(46
)
 
$
11,357

 
$
(52
)
 
$
13,361


14



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, 2015.
 
Less than 12 months
 
12 months or more
 
Total
December 31, 2015
Number
of
Securities
 
Unrealized
Losses
 
Fair
Value
 
Number
of
Securities
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
($ in Thousands)
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
1

 
$
(2
)
 
$
997

 

 
$

 
$

 
$
(2
)
 
$
997

Residential mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC
17

 
(1,548
)
 
220,852

 
14

 
(6,612
)
 
338,186

 
(8,160
)
 
559,038

GNMA
46

 
(16,460
)
 
1,434,484

 

 

 

 
(16,460
)
 
1,434,484

Private-label
1

 
(1
)
 
83

 
3

 
(13
)
 
1,565

 
(14
)
 
1,648

GNMA commercial mortgage-related securities
40

 
(9,610
)
 
1,132,844

 
21

 
(18,891
)
 
448,218

 
(28,501
)
 
1,581,062

Total
105

 
$
(27,621
)
 
$
2,789,260

 
38

 
$
(25,516
)
 
$
787,969

 
$
(53,137
)
 
$
3,577,229

Investment securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
53

 
$
(146
)
 
$
23,137

 
24

 
$
(193
)
 
$
9,254

 
$
(339
)
 
$
32,391

Residential mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FNMA / FHLMC
10

 
(177
)
 
12,754

 
3

 
(468
)
 
11,106

 
(645
)
 
23,860

GNMA
21

 
(201
)
 
45,499

 
3

 
(108
)
 
6,797

 
(309
)
 
52,296

Total
84

 
$
(524
)
 
$
81,390

 
30

 
$
(769
)
 
$
27,157

 
$
(1,293
)
 
$
108,547

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, 2016, represents an other-than-temporary impairment as these unrealized losses are primarily attributable to changes in interest rates and the current market conditions, and not credit deterioration. The unrealized losses reported for municipal securities relate to various state and local political subdivisions and school districts. The Corporation currently does not intend to sell nor does it believe that it will be required to sell the securities contained in the above unrealized losses table before recovery of their amortized cost basis. The reduction in unrealized losses at June 30, 2016 is due to the reduction in overall interest rates.  The U.S. Treasury 3-year and 5-year rates dropped by 60 basis points ("bp") and 75 bp, respectively, from December 31, 2015.
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, 2016, and December 31, 2015, the Corporation had FHLB stock of $120 million and $74 million, respectively, reflecting the overall increase in FHLB short-term and long-term funding. The Corporation had Federal Reserve Bank stock of $75 million and $73 million at June 30, 2016 and December 31, 2015, respectively.

15



Note 7 Loans
The period end loan composition was as follows.
 
June 30,
2016
 
December 31,
2015
 
($ in Thousands)
Commercial and industrial
$
6,701,986

 
$
6,190,683

Commercial real estate — owner occupied
921,736

 
918,212

Commercial and business lending
7,623,722

 
7,108,895

Commercial real estate — investor
3,495,791

 
3,234,266

Real estate construction
1,285,573

 
1,162,145

Commercial real estate lending
4,781,364

 
4,396,411

Total commercial
12,405,086

 
11,505,306

Residential mortgage
6,035,720

 
5,783,267

Home equity
968,771

 
1,005,802

Other consumer
405,709

 
419,968

Total consumer
7,410,200

 
7,209,037

Total loans
$
19,815,286

 
$
18,714,343

The following table presents commercial and consumer loans by credit quality indicator at June 30, 2016.
 
Pass
 
Special Mention
 
Potential Problem
 
Nonaccrual
 
Total
 
($ in Thousands)
Commercial and industrial
$
5,910,730

 
$
217,999

 
$
379,818

 
$
193,439

 
$
6,701,986

Commercial real estate - owner occupied
826,327

 
40,103

 
45,671

 
9,635

 
921,736

Commercial and business lending
6,737,057

 
258,102

 
425,489

 
203,074

 
7,623,722

Commercial real estate - investor
3,436,680

 
22,502

 
25,081

 
11,528

 
3,495,791

Real estate construction
1,281,526

 
973

 
2,117

 
957

 
1,285,573

Commercial real estate lending
4,718,206

 
23,475

 
27,198

 
12,485

 
4,781,364

Total commercial
11,455,263

 
281,577

 
452,687

 
215,559

 
12,405,086

Residential mortgage
5,975,297

 
4,170

 
3,953

 
52,300

 
6,035,720

Home equity
952,727

 
1,587

 
94

 
14,363

 
968,771

Other consumer
404,894

 
435

 

 
380

 
405,709

Total consumer
7,332,918

 
6,192

 
4,047

 
67,043

 
7,410,200

Total
$
18,788,181

 
$
287,769

 
$
456,734

 
$
282,602

 
$
19,815,286


16



The following table presents commercial and consumer loans by credit quality indicator at December 31, 2015. 
 
Pass
 
Special Mention
 
Potential Problem
 
Nonaccrual
 
Total
 
($ in Thousands)
Commercial and industrial
$
5,522,809

 
$
341,169

 
$
233,130

 
$
93,575

 
$
6,190,683

Commercial real estate - owner occupied
835,572

 
38,885

 
35,706

 
8,049

 
918,212

Commercial and business lending
6,358,381

 
380,054

 
268,836

 
101,624

 
7,108,895

Commercial real estate - investor
3,153,703

 
45,976

 
25,944

 
8,643

 
3,234,266

Real estate construction
1,157,034

 
252

 
3,919

 
940

 
1,162,145

Commercial real estate lending
4,310,737

 
46,228

 
29,863

 
9,583

 
4,396,411

Total commercial
10,669,118

 
426,282

 
298,699

 
111,207

 
11,505,306

Residential mortgage
5,727,437

 
1,552

 
2,796

 
51,482

 
5,783,267

Home equity
988,574

 
1,762

 
222

 
15,244

 
1,005,802

Other consumer
419,087

 
556

 

 
325

 
419,968

Total consumer
7,135,098

 
3,870

 
3,018

 
67,051

 
7,209,037

Total
$
17,804,216

 
$
430,152

 
$
301,717

 
$
178,258

 
$
18,714,343

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 loans are reviewed at a minimum on a quarterly basis, while pass rated credits are reviewed on an annual basis or more frequently if the loan renewal is less than one year or if otherwise warranted.

17



The following table presents loans by past due status at June 30, 2016.
 
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
$
6,506,175

 
$
1,755

 
$
369

 
$
248

 
$
193,439

 
$
6,701,986

Commercial real estate - owner occupied
911,908

 
193

 

 

 
9,635

 
921,736

Commercial and business lending
7,418,083

 
1,948

 
369

 
248

 
203,074

 
7,623,722

Commercial real estate - investor
3,481,548

 
2,715

 

 

 
11,528

 
3,495,791

Real estate construction
1,284,092

 
427

 
97

 

 
957

 
1,285,573

Commercial real estate lending
4,765,640

 
3,142

 
97

 

 
12,485

 
4,781,364

Total commercial
12,183,723

 
5,090

 
466

 
248

 
215,559

 
12,405,086

Residential mortgage
5,976,038

 
7,040

 
342

 

 
52,300

 
6,035,720

Home equity
946,678

 
6,150

 
1,580

 

 
14,363

 
968,771

Other consumer
402,188

 
1,313

 
582

 
1,246

 
380

 
405,709

Total consumer
7,324,904

 
14,503

 
2,504

 
1,246

 
67,043

 
7,410,200

Total
$
19,508,627

 
$
19,593

 
$
2,970

 
$
1,494

 
$
282,602

 
$
19,815,286

(a)
The recorded investment in loans past due 90 days or more and still accruing totaled $1 million at June 30, 2016 (the same as the reported balances for the accruing loans noted above).
(b)
Of the total nonaccrual loans, $236 million or 84% were current with respect to payment at June 30, 2016.
The following table presents loans by past due status at December 31, 2015.
 
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
$
6,095,848

 
$
602

 
$
409

 
$
249

 
$
93,575

 
$
6,190,683

Commercial real estate - owner occupied
903,021

 
7,142

 

 

 
8,049

 
918,212

Commercial and business lending
6,998,869

 
7,744

 
409

 
249

 
101,624

 
7,108,895

Commercial real estate - investor
3,225,332

 
291

 

 

 
8,643

 
3,234,266

Real estate construction
1,160,909

 
270

 
26

 

 
940

 
1,162,145

Commercial real estate lending
4,386,241

 
561

 
26

 

 
9,583

 
4,396,411

Total commercial
11,385,110

 
8,305

 
435

 
249

 
111,207

 
11,505,306

Residential mortgage
5,726,855

 
4,491

 
439

 

 
51,482

 
5,783,267

Home equity
982,639

 
6,190

 
1,729

 

 
15,244

 
1,005,802

Other consumer
416,374

 
1,195

 
675

 
1,399

 
325

 
419,968

Total consumer
7,125,868

 
11,876

 
2,843

 
1,399

 
67,051

 
7,209,037

Total
$
18,510,978

 
$
20,181

 
$
3,278

 
$
1,648

 
$
178,258

 
$
18,714,343

(a)
The recorded investment in loans past due 90 days or more and still accruing totaled $2 million at December 31, 2015 (the same as the reported balances for the accruing loans noted above).
(b)
Of the total nonaccrual loans, $124 million or 69% were current with respect to payment at December 31, 2015.

18



The following table presents impaired loans at June 30, 2016.
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
($ in Thousands)
Loans with a related allowance
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
30,866

 
$
31,402

 
$
675

 
$
30,915

 
$
443

Commercial real estate — owner occupied
10,746

 
10,917

 
622

 
10,904

 
189

Commercial and business lending
41,612

 
42,319

 
1,297

 
41,819

 
632

Commercial real estate — investor
21,983

 
22,782

 
694

 
22,387

 
943

Real estate construction
1,329

 
1,801

 
530

 
1,356

 
34

Commercial real estate lending
23,312

 
24,583

 
1,224

 
23,743

 
977

Total commercial
64,924

 
66,902

 
2,521

 
65,562

 
1,609

Residential mortgage
64,547

 
69,517

 
11,684

 
65,674

 
1,151

Home equity
20,668

 
22,613

 
9,741

 
21,092

 
535

Other consumer
1,286

 
1,346

 
254

 
1,316

 
18

Total consumer
86,501

 
93,476

 
21,679

 
88,082

 
1,704

Total loans
$
151,425

 
$
160,378

 
$
24,200

 
$
153,644

 
$
3,313

Loans with no related allowance
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
191,752

 
$
212,763

 
$

 
$
193,553

 
$
348

Commercial real estate — owner occupied
6,398

 
8,854

 

 
6,580

 

Commercial and business lending
198,150

 
221,617

 

 
200,133

 
348

Commercial real estate — investor
9,736

 
10,032

 

 
9,809

 

Real estate construction

 

 

 

 

Commercial real estate lending
9,736

 
10,032

 

 
9,809

 

Total commercial
207,886

 
231,649

 

 
209,942

 
348

Residential mortgage
6,067

 
6,331

 

 
6,138

 
96

Home equity
650

 
651

 

 
652

 
20

Other consumer

 

 

 

 

Total consumer
6,717

 
6,982

 

 
6,790

 
116

Total loans
$
214,603

 
$
238,631

 
$

 
$
216,732

 
$
464

Total
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
222,618

 
$
244,165

 
$
675

 
$
224,468

 
$
791

Commercial real estate — owner occupied
17,144

 
19,771

 
622

 
17,484

 
189

Commercial and business lending
239,762

 
263,936

 
1,297

 
241,952

 
980

Commercial real estate — investor
31,719

 
32,814

 
694

 
32,196

 
943

Real estate construction
1,329

 
1,801

 
530

 
1,356

 
34

Commercial real estate lending
33,048

 
34,615

 
1,224

 
33,552

 
977

Total commercial
272,810

 
298,551

 
2,521

 
275,504

 
1,957

Residential mortgage
70,614

 
75,848

 
11,684

 
71,812

 
1,247

Home equity
21,318

 
23,264

 
9,741

 
21,744

 
555

Other consumer
1,286

 
1,346

 
254

 
1,316

 
18

Total consumer
93,218

 
100,458

 
21,679

 
94,872

 
1,820

Total loans(a)
$
366,028

 
$
399,009

 
$
24,200

 
$
370,376

 
$
3,777

(a)
The net recorded investment (defined as recorded investment, net of the related allowance) of the impaired loans represented 86% of the unpaid principal balance at June 30, 2016.

19



The following table presents impaired loans at December 31, 2015. 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
($ in Thousands)
Loans with a related allowance
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
57,785

 
$
59,409

 
$
8,162

 
$
46,833

 
$
855

Commercial real estate — owner occupied
9,705

 
9,804

 
448

 
10,087

 
412

Commercial and business lending
67,490

 
69,213

 
8,610

 
56,920

 
1,267

Commercial real estate — investor
27,822

 
29,444

 
1,831

 
28,278

 
1,914

Real estate construction
1,450

 
2,154

 
453

 
1,667

 
66

Commercial real estate lending
29,272

 
31,598

 
2,284

 
29,945

 
1,980

Total commercial
96,762

 
100,811

 
10,894

 
86,865

 
3,247

Residential mortgage
66,590

 
71,084

 
12,462

 
68,183

 
2,374

Home equity
21,769

 
23,989

 
10,118

 
22,624

 
1,147

Other consumer
1,154

 
1,225

 
195

 
1,199

 
30

Total consumer
89,513

 
96,298

 
22,775

 
92,006

 
3,551

Total loans
$
186,275

 
$
197,109

 
$
33,669

 
$
178,871

 
$
6,798

Loans with no related allowance
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
65,083

 
$
72,259

 
$

 
$
79,573

 
$
1,657

Commercial real estate — owner occupied
6,221

 
6,648

 

 
6,534

 
15

Commercial and business lending
71,304

 
78,907

 

 
86,107

 
1,672

Commercial real estate — investor
2,736

 
2,840

 

 
2,763

 
90

Real estate construction

 

 

 

 

Commercial real estate lending
2,736

 
2,840

 

 
2,763

 
90

Total commercial
74,040

 
81,747

 

 
88,870

 
1,762

Residential mortgage
4,762

 
5,033

 

 
4,726

 
126

Home equity
544

 
544

 

 
544

 
30

Other consumer

 

 

 

 

Total consumer
5,306

 
5,577

 

 
5,270

 
156

Total loans
$
79,346

 
$
87,324

 
$

 
$
94,140

 
$
1,918

Total
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
122,868

 
$
131,668

 
$
8,162

 
$
126,406

 
$
2,512

Commercial real estate — owner occupied
15,926

 
16,452

 
448

 
16,621

 
427

Commercial and business lending
138,794

 
148,120

 
8,610

 
143,027

 
2,939

Commercial real estate — investor
30,558

 
32,284

 
1,831

 
31,041

 
2,004

Real estate construction
1,450

 
2,154

 
453

 
1,667

 
66

Commercial real estate lending
32,008

 
34,438

 
2,284

 
32,708

 
2,070

Total commercial
170,802

 
182,558

 
10,894

 
175,735

 
5,009

Residential mortgage
71,352

 
76,117

 
12,462

 
72,909

 
2,500

Home equity
22,313

 
24,533

 
10,118

 
23,168

 
1,177

Other consumer
1,154

 
1,225

 
195

 
1,199

 
30

Total consumer
94,819

 
101,875

 
22,775

 
97,276

 
3,707

Total loans(a)
$
265,621

 
$
284,433

 
$
33,669

 
$
273,011

 
$
8,716

(a)
The net recorded investment (defined as recorded investment, net of the related allowance) of the impaired loans represented 82% of the unpaid principal balance at December 31, 2015.

20



Troubled Debt Restructurings (“Restructured Loans”):
Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. See Note 1 “Summary of Significant Accounting Policies," in the Corporation’s 2015 Annual Report on Form 10-K for the Corporation's accounting policy for troubled debt restructurings. The Corporation had a recorded investment of $8 million in loans modified in troubled debt restructurings for the six months ended June 30, 2016, of which approximately $3 million was in accrual status and $5 million was in nonaccrual pending a sustained period of repayment. The following table presents nonaccrual and performing restructured loans by loan portfolio.
 
June 30, 2016
 
December 31, 2015
 
Performing
Restructured
Loans
 
Nonaccrual
Restructured
Loans(a)
 
Performing
Restructured
Loans
 
Nonaccrual
Restructured
Loans(a)
 
($ in Thousands)
Commercial and industrial
$
29,179

 
$
2,536

 
$
29,293

 
$
1,714

Commercial real estate — owner occupied
7,509

 
2,620

 
7,877

 
2,703

Commercial real estate — investor
20,191

 
957

 
21,915

 
3,936

Real estate construction
372

 
94

 
510

 
177

Residential mortgage
18,314

 
24,479

 
19,870

 
24,592

Home equity
6,955

 
4,127

 
7,069

 
4,522

Other consumer
906

 
28

 
829

 
40

   Total
$
83,426

 
$
34,841

 
$
87,363

 
$
37,684

(a)
Nonaccrual restructured loans have been included within nonaccrual loans.
The following table provides the number of loans modified in a troubled debt restructuring by loan portfolio during the six months ended June 30, 2016 and 2015, and the recorded investment and unpaid principal balance as of June 30, 2016 and 2015.
 
Six Months Ended June 30, 2016
 
Six Months Ended June 30, 2015
 
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
11

 
$
2,608

 
$
2,676

 
6

 
$
1,847

 
$
2,296

Commercial real estate — owner occupied
1

 
120

 
126

 
5

 
3,506

 
3,636

Commercial real estate — investor

 

 

 
1

 
2,237

 
2,237

Real estate construction

 

 

 
1

 
6

 
6

Residential mortgage
48

 
3,942

 
4,171

 
52

 
5,249

 
5,380

Home equity
37

 
1,433

 
1,554

 
49

 
1,897

 
1,898

   Total
97

 
$
8,103

 
$
8,527

 
114

 
$
14,742

 
$
15,453

(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, 2016, 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, 2016.


21



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, 2016 and 2015, as well as the recorded investment in these restructured loans as of June 30, 2016 and 2015.
 
Six Months Ended June 30, 2016
 
Six Months Ended June 30, 2015
 
Number of
Loans
 
Recorded
Investment
 
Number of
Loans
 
Recorded
Investment
 
($ in Thousands)
Commercial and industrial

 
$

 
1

 
$
43

Commercial real estate — owner occupied
2

 
168

 
1

 
297

Residential mortgage
25

 
2,407

 
29

 
2,230

Home equity
11

 
164

 
22

 
1,001

   Total
38

 
$
2,739

 
53

 
$
3,571

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.
A summary of the changes in the allowance for loan losses by portfolio segment for the six months ended June 30, 2016, 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, 2015
$
129,959

 
$
18,680

 
$
43,018

 
$
25,266

 
$
28,261

 
$
23,555

 
$
5,525

 
$
274,264

Charge offs
(37,522
)
 
(106
)
 
(887
)
 
(330
)
 
(2,334
)
 
(2,702
)
 
(1,985
)
 
(45,866
)
Recoveries
4,022

 
43

 
1,566

 
83

 
345

 
1,873

 
450

 
8,382

Net charge offs
(33,500
)
 
(63
)
 
679

 
(247
)
 
(1,989
)
 
(829
)
 
(1,535
)
 
(37,484
)
Provision for loan losses
38,128

 
(2,767
)
 
(2,666
)
 
(3,679
)
 
1,624

 
(1,224
)
 
1,584

 
31,000

June 30, 2016
$
134,587

 
$
15,850

 
$
41,031

 
$
21,340

 
$
27,896

 
$
21,502

 
$
5,574

 
$
267,780

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$
165

 
$
45

 
$

 
$
14

 
$

 
$

 
$
224

Collectively evaluated for impairment
134,587

 
15,685

 
40,986

 
21,340

 
27,882

 
21,502

 
5,574

 
267,556

Total allowance for loan losses
$
134,587

 
$
15,850

 
$
41,031

 
$
21,340

 
$
27,896

 
$
21,502

 
$
5,574

 
$
267,780

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
191,752

 
$
7,790

 
$
10,036

 
$

 
$
6,800

 
$
650

 
$

 
$
217,028

Collectively evaluated for impairment
6,510,234

 
913,946

 
3,485,755

 
1,285,573

 
6,028,920

 
968,121

 
405,709

 
19,598,258

Total loans
$
6,701,986

 
$
921,736

 
$
3,495,791

 
$
1,285,573

 
$
6,035,720

 
$
968,771

 
$
405,709

 
$
19,815,286

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.

22



For comparison purposes, a summary of the changes in the allowance for loan losses by portfolio segment for the year ended December 31, 2015, 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, 2014
$
117,635

 
$
16,510

 
$
46,333

 
$
20,999

 
$
31,926

 
$
26,464

 
$
6,435

 
$
266,302

Charge offs
(27,687
)
 
(2,645
)
 
(4,645
)
 
(750
)
 
(5,636
)
 
(7,048
)
 
(3,869
)
 
(52,280
)
Recoveries
9,821

 
921

 
4,157

 
2,268

 
1,077

 
3,233

 
765

 
22,242

Net charge offs
(17,866
)
 
(1,724
)
 
(488
)
 
1,518

 
(4,559
)
 
(3,815
)
 
(3,104
)
 
(30,038
)
Provision for loan losses
30,190

 
3,894

 
(2,827
)
 
2,749

 
894

 
906

 
2,194

 
38,000

December 31, 2015
$
129,959

 
$
18,680

 
$
43,018

 
$
25,266

 
$
28,261

 
$
23,555

 
$
5,525

 
$
274,264

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
7,522

 
$

 
$
229

 
$

 
$
166

 
$
46

 
$

 
$
7,963

Collectively evaluated for impairment
122,437

 
18,680

 
42,789

 
25,266

 
28,095

 
23,509

 
5,525

 
266,301

Total allowance for loan losses
$
129,959

 
$
18,680

 
$
43,018

 
$
25,266

 
$
28,261

 
$
23,555

 
$
5,525

 
$
274,264

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
91,569

 
$
6,221

 
$
5,460

 
$

 
$
6,956

 
$
1,281

 
$

 
$
111,487

Collectively evaluated for impairment
6,099,114

 
911,991

 
3,228,806

 
1,162,145

 
5,776,311

 
1,004,521

 
419,968

 
18,602,856

Total loans
$
6,190,683

 
$
918,212

 
$
3,234,266

 
$
1,162,145

 
$
5,783,267

 
$
1,005,802

 
$
419,968

 
$
18,714,343

A summary of the changes in the allowance for unfunded commitments was as follows.
 
Six Months Ended
June 30, 2016
 
Year Ended
December 31, 2015
 
($ in Thousands)
Allowance for Unfunded Commitments:
 
 
 
Balance at beginning of period
$
24,400

 
$
24,900

Provision for unfunded commitments
3,000

 
(500
)
Balance at end of period
$
27,400

 
$
24,400

Note 8 Goodwill and Other Intangible Assets
Goodwill:  Goodwill is not amortized but, instead, is 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 impairment testing process is conducted by assigning net assets and goodwill to each reporting unit. An initial qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair value is necessary. When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required whereby the fair value of each reporting unit is calculated and compared to the recorded book value, “step one.” If the calculated fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired and “step two” is not considered necessary. If the carrying value of a reporting unit exceeds its calculated fair value, the impairment test continues (“step two”) by comparing the carrying value of the reporting unit’s goodwill to the implied fair value of goodwill. The implied fair value is computed by adjusting all assets and liabilities of the reporting unit to current fair value with the offset adjustment to goodwill. The adjusted goodwill balance is the implied fair value of the goodwill. An impairment charge is recognized if the carrying value of goodwill exceeds the implied fair value of goodwill.
The Corporation conducted its most recent annual impairment testing in May 2016, 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 2016 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

23



analysis was not required. There were no events since the May 2016 impairment testing that have changed the Corporation's impairment assessment conclusion. There were no impairment charges recorded in 2015 or the first six months of 2016.
At June 30, 2016, the Corporation had goodwill of $972 million, compared to $969 million at December 31, 2015. There was an addition to the carrying amount of goodwill of approximately $3 million as a result of two small insurance acquisitions during the quarter ended March 31, 2016. See Note 2 for additional information on the Corporation's acquisitions.
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. Core deposit intangibles of approximately $15 million were fully amortized in 2015 and have been removed from both the gross carrying amount and the accumulated amortization for 2016. There was an addition to the gross carrying amount of other intangibles of $1 million for the customer relationships associated with two small insurance acquisitions that occurred during the quarter ended March 31, 2016. 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, 2016
 
Year Ended
December 31, 2015
 
($ in Thousands)
Core deposit intangibles:
 
 
 
Gross carrying amount
$
4,385

 
$
19,545

Accumulated amortization
(4,132
)
 
(19,152
)
Net book value
$
253

 
$
393

Amortization during the year
$
140

 
$
1,404

Other intangibles:
 
 
 
Gross carrying amount
$
32,410

 
$
31,398

Accumulated amortization
(16,236
)
 
(15,333
)
Net book value
$
16,174

 
$
16,065

Additions during the period
$
1,012

 
$
12,115

Amortization during the year
$
903

 
$
1,690

Mortgage Servicing Rights: 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. 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.

24



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, 2016
 
Year Ended
December 31, 2015
 
($ in Thousands)
Mortgage servicing rights:
Mortgage servicing rights at beginning of period
$
62,150

 
$
61,379

Additions
4,149

 
12,372

Amortization
(5,896
)
 
(11,601
)
Mortgage servicing rights at end of period
$
60,403

 
$
62,150

Valuation allowance at beginning of period
(809
)
 
(1,234
)
(Additions) recoveries, net
(2,120
)
 
425

Valuation allowance at end of period
(2,929
)
 
(809
)
Mortgage servicing rights, net
$
57,474

 
$
61,341

Fair value of mortgage servicing rights
$
58,331

 
$
70,686

Portfolio of residential mortgage loans serviced for others (“servicing portfolio”)
$
7,776,067

 
$
7,915,224

Mortgage servicing rights, net to servicing portfolio
0.74
%
 
0.77
%
Mortgage servicing rights expense (1)
$
8,016

 
$
11,176

(1)
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, 2016. 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, 2016
$
141

 
$
909

 
$
6,255

2017
112

 
1,786

 
10,436

2018

 
1,756

 
8,288

2019

 
1,457

 
6,674

2020

 
1,340

 
5,410

2021

 
1,316

 
4,422

Beyond 2021

 
7,610

 
18,918

Total Estimated Amortization Expense
$
253

 
$
16,174

 
$
60,403


25



Note 9 Short and Long-Term Funding
The components of short-term funding (funding with original contractual maturities of one year or less) and long-term funding (funding with original contractual maturities greater than one year) were as follows.
 
June 30, 2016
 
December 31, 2015
 
($ in Thousands)
Short-Term Funding
 
 
 
Federal funds purchased
$
44,270

 
$
47,870

Securities sold under agreements to repurchase
464,880

 
383,568

Federal funds purchased and securities sold under agreements to repurchase
$
509,150

 
$
431,438

FHLB advances
1,326,000

 
335,000

Commercial paper
76,407

 
67,978

Other short-term funding
1,402,407

 
402,978

Total short-term funding
$
1,911,557

 
$
834,416

Long-Term Funding
 
 
 
FHLB advances
$
3,015,207

 
$
1,750,225

Senior notes, at par
250,000

 
680,000

Subordinated notes, at par
250,000

 
250,000

Other long-term funding and capitalized costs
(3,732
)
 
(4,061
)
Total long-term funding
3,511,475

 
2,676,164

Total short and long-term funding
$
5,423,032

 
$
3,510,580

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, 2016, the Corporation pledged GSE mortgage-related securities with a fair value of $574 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, 2016 and December 31, 2015 are presented in the following table.

 
Remaining Contractual Maturity of the Agreements
June 30, 2016
Overnight and Continuous
Up to 30 days
30-90 days
Greater than 90 days
Total
 
 
 
($ in Thousands)
 
 
Repurchase agreements
 
 
 
 
 
     GSE securities
$
464,880

$

$

$

$
464,880

Total
$
464,880

$

$

$

$
464,880

December 31, 2015
 
 
 
 
 
Repurchase agreements
 
 
 
 
 
     GSE securities
$
383,568

$

$

$

$
383,568

Total
$
383,568

$

$

$

$
383,568



26



Long-term funding:

FHLB advances:  For the six months ended June 30, 2016, the long-term FHLB advances, with maturity dates primarily ranging from 2017 through 2019, had an average interest rate of 0.36%, compared to 0.13% for the full year December 31, 2015. The FHLB advances are indexed to the FHLB discount note and re-price at varying intervals. The advances offer flexible, low cost, long-term funding that improves the Corporation’s liquidity profile.
2011 Senior Notes:  In March 2011, the Corporation issued $300 million of senior notes due March 2016, and callable February 2016, with a 5.125% fixed coupon at a discount. In September 2011, the Corporation “re-opened” the offering and issued an additional $130 million of the same notes at a premium. All notes were redeemed in February 2016 at par.
2014 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.
2014 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.
Note 10 Derivative and Hedging Activities
The Corporation facilitates customer borrowing activity by providing various interest rate risk management, commodity hedging, and foreign currency exchange solutions through its capital markets area. To date, all of the notional amounts of customer transactions have been matched with a mirror hedge with another counterparty. The Corporation has used, and may use again in the future, derivative instruments to hedge the variability in interest payments or protect the value of certain assets and liabilities recorded on its consolidated balance sheets from changes in interest rates. The predominant derivative and hedging activities include interest rate-related instruments (swaps and caps), foreign currency exchange forwards, commodity contracts, written options, purchased options, and certain mortgage banking activities.
The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. The Corporation is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. To mitigate the counterparty risk, interest rate 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 was required to pledge $38 million of investment securities as collateral at June 30, 2016, and pledged $9 million of investment securities as collateral at December 31, 2015. 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, 2016, the Corporation posted cash collateral for the margin of $40 million, compared to $22 million at December 31, 2015.
The Corporation’s derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. The fair value of the Corporation’s interest rate-related 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 13 for additional fair value information and disclosures.
The table below identifies the balance sheet category and fair values of the Corporation’s derivative instruments which are not designated as hedging instruments.
 
June 30, 2016
 
December 31, 2015
($ in Thousands)
Notional Amount
 
Fair
Value
 
Balance Sheet
Category
 
Notional Amount
 
Fair
Value
 
Balance Sheet
Category
Interest rate-related instruments — customer and mirror
$
1,829,842

 
$
56,334

 
Trading assets
 
$
1,665,965

 
$
29,391

 
Trading assets
Interest rate-related instruments — customer and mirror
1,829,842

 
(59,255
)
 
Trading liabilities
 
1,665,965

 
(30,886
)
 
Trading liabilities
Interest rate lock commitments (mortgage)
530,571

 
4,270

 
Other assets
 
271,530

 
958

 
Other assets
Forward commitments (mortgage)
353,185

 
(4,205
)
 
Other liabilities
 
231,798

 
403

 
Other assets
Foreign currency exchange forwards
99,074

 
3,159

 
Trading assets
 
72,976

 
1,532

 
Trading assets
Foreign currency exchange forwards
92,457

 
(3,073
)
 
Trading liabilities
 
65,649

 
(1,398
)
 
Trading liabilities
Commodity contracts
109,971

 
17,619

 
Trading assets
 
44,380

 
1,269

 
Trading assets
Commodity contracts
110,457

 
(17,138
)
 
Trading liabilities
 
44,256

 
(1,146
)
 
Trading liabilities
Purchased options (time deposit)
101,421

 
2,336

 
Other assets
 
104,582

 
2,715

 
Other assets
Written options (time deposit)
101,421

 
(2,336
)
 
Other liabilities
 
104,582

 
(2,715
)
 
Other liabilities


27



The table below identifies the income statement category of the gains and losses recognized in income on the Corporation’s derivative instruments not designated as hedging instruments.
 
Income Statement Category of
Gain / (Loss) Recognized in Income
For the Six Months Ended June 30,
($ in Thousands)
 
2016
 
2015
Derivative Instruments:
 
 
 
 
Interest rate-related instruments — customer and mirror, net
Capital market fees, net
$
(1,426
)
 
$
255

Interest rate lock commitments (mortgage)
Mortgage banking, net
3,312

 
(870
)
Forward commitments (mortgage)
Mortgage banking, net
(4,608
)
 
5,204

Foreign currency exchange forwards
Capital market fees, net
(48
)
 
128

Commodity contracts
Capital market fees, net
358

 

Derivatives to Accommodate Customer Needs
The Corporation enters into various derivative contracts which are not designated as hedging instruments. Such 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 market fees, 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. Our 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. Such foreign currency exchange contracts are carried at fair value on the consolidated balance sheets with changes in fair value recorded as a component of capital market fees, net.
Commodity contracts: The Corporation provides commodity risk management services to commercial customers, exclusively oil and gas 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. Commodity contracts are carried at fair value on the consolidated balance sheets with changes in fair value recorded as a component of capital market fees, net.
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.

28



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 we have with our commercial customers are not subject to an enforceable master netting arrangement, and therefore, are excluded from this table.
 
Gross
amounts
recognized
 
 
 
Gross amounts not offset
in the balance sheet
 
 
 
Gross amounts
offset in the
balance sheet
 
Net amounts
presented in
the balance sheet
 
Financial
instruments
 
Collateral
 
Net amount
 
($ in Thousands)
 
 
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
Interest and commodity agreements
$
3,919

 
$

 
$
3,919

 
$
(3,919
)
 
$

 
$

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest and commodity agreements
$
71,741

 
$

 
$
71,741

 
$
(3,919
)
 
$
(67,822
)
 
$

December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
Interest and commodity instruments
$
1,466

 
$

 
$
1,466

 
$
(1,466
)
 
$

 
$

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest and commodity instruments
$
30,200

 
$

 
$
30,200

 
$
(1,466
)
 
$
(28,734
)
 
$


29



Note 12 Commitments, Off-Balance Sheet Arrangements, and Legal Proceedings
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, 2016
 
December 31, 2015
 
($ in Thousands)
Commitments to extend credit, excluding commitments to originate residential mortgage loans held for sale(1)(2)
$
7,399,847

 
$
7,402,518

Commercial letters of credit(1)
7,100

 
9,945

Standby letters of credit(3)
285,118

 
296,508


1)
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, 2016 or December 31, 2015.
2)
Interest rate lock commitments to originate residential mortgage loans held for sale are considered derivative instruments and are disclosed in Note 10.
3)
The Corporation has established a liability of $3 million at both June 30, 2016 and December 31, 2015, 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 increased to $27 million at June 30, 2016 compared to $24 million at December 31, 2015, 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 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 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 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, 2016, was $68 million, compared to $52 million at December 31, 2015, included in other assets on the consolidated balance sheets. Related to these investments, the Corporation had remaining commitments to fund of $59 million at June 30, 2016, and $61 million at December 31, 2015.

30



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. It is not possible for management to assess the probability of a material adverse outcome or reasonably estimate the amount of any potential loss at this time. 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.

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 a three-year period 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 legacy debt protection and identity protection products provided by third parties, and 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.

Two complaints were filed against the Bank on January 11, 2016 in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division in connection with the In re: World Marketing Chicago, LLC, et al Chapter 11 bankruptcy proceeding. In the first complaint, The Official Committee of Unsecured Creditors of World Marketing Chicago, LLC, et al v. Associated Bank, N.A., the plaintiff seeks to avoid guarantees and pledges of collateral given by the debtors to secure a revolving financing commitment of $6 million to the debtors’ parent company from the Bank. The plaintiff alleges a variety of legal theories under federal and state law, including fraudulent conveyance, preferential transfer and conversion, in support of its position. The plaintiff seeks return of approximately $4 million paid to the Bank and the avoidance of the security interest in the collateral securing the remaining indebtedness to the Bank. The Bank intends to vigorously defend this lawsuit. In the second complaint, American

31



Funds Service Company v. Associated Bank, N.A., the plaintiff alleges that approximately $600,000 of funds it had advanced to the World Marketing entities to apply towards future postage fees was swept by the Bank from World Marketing’s bank accounts. Plaintiff seeks the return of such funds from the Bank under several theories, including Sec. 541(d) of the Bankruptcy Code, the creation of a resulting trust, and unjust enrichment. The Bank intends to vigorously defend this lawsuit. It is not possible for management to assess the probability of a material adverse outcome or reasonably estimate the amount of any potential loss at this time with respect to these two lawsuits.
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 our 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 and $3 million during the six months ended June 30, 2016 and the year ended December 31, 2015, respectively. The loss reimbursement and settlement claims paid for the six months ended June 30, 2016 and the year ended December 31, 2015, respectively, were negligible. Make whole requests during 2015 and the first six months of 2016 generally arose from loans sold during the period of January 1, 2012 to June 30, 2016, which totaled $8.2 billion at the time of sale, and consisted primarily of loans sold to GSEs. As of June 30, 2016, approximately $5.7 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.
 
For the Six Months Ended
June 30, 2016
 
For the Year Ended
December 31, 2015
 
($ in Thousands)
Balance at beginning of period
$
1,197

 
$
3,258

Repurchase provision expense
155

 
428

Adjustments to provision expense

 
(2,450
)
Charge offs, net
(6
)
 
(39
)
Balance at end of period
$
1,346

 
$
1,197

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, 2016, and December 31, 2015, there were approximately $59 million and $68 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.
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, 2016 and December 31, 2015, there were $112 million and $132 million, respectively, of such residential mortgage loans with credit risk recourse, upon which there have been negligible historical losses to the Corporation.

32



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.
Derivative financial instruments (interest rate-related instruments):  The Corporation has used, and may use again in the future, interest rate swaps to manage its interest rate risk. In addition, the Corporation offers interest rate-related instruments (swaps and caps) to service our 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 measurements 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.
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, 2016, and December 31, 2015, 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 our 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.

33



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 instrument, and are classified in Level 2 of the fair value hierarchy. See Note 10 for additional disclosures regarding the Corporation’s commodity contracts.
Derivative financial instruments (mortgage derivatives):  Mortgage derivatives include interest rate lock commitments to originate residential mortgage loans held for sale to individual customers and forward commitments to sell residential mortgage loans to various investors. The Corporation relies on an internal valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment groups.
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.
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.
Loans Held for Sale:  Loans held for sale, which consist generally of current production of certain fixed-rate, first-lien residential mortgage loans, and certain commercial loans, once a decision has been made to sell such loans, are carried at the lower of cost or estimated fair value. 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 nonrecurring fair value measurement.
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. See Note 8 for additional disclosure regarding the Corporation’s mortgage servicing rights.

34



The table below presents the Corporation’s investment securities available for sale and derivative financial instruments measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015, aggregated by the level in the fair value hierarchy within which those measurements fall.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Fair Value Hierarchy
 
June 30, 2016
 
December 31, 2015
 
 
 
($ in Thousands)
Assets:
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
U.S. Treasury securities
Level 1
 
$
1,001

 
$
997

Residential mortgage-related securities:
 
 
 
 
 
FNMA / FHLMC
Level 2
 
990,379

 
1,414,626

GNMA
Level 2
 
1,677,246

 
1,590,003

Private-label
Level 2
 
1,410

 
1,709

GNMA commercial mortgage-related securities
Level 2
 
2,126,921

 
1,955,310

Other securities (debt and equity)
Level 1
 
1,609

 
1,569

Other securities (debt and equity)
Level 2
 
3,000

 
3,000

Other securities (debt and equity)
Level 3
 
200

 
200

Total investment securities available for sale
Level 1
 
2,610

 
2,566

Total investment securities available for sale
Level 2
 
4,798,956

 
4,964,648

Total investment securities available for sale
Level 3
 
200

 
200

Interest rate-related instruments
Level 2
 
56,334

 
29,391

Foreign currency exchange forwards
Level 2
 
3,159

 
1,532

Interest rate lock commitments to originate residential mortgage loans held for sale
Level 3
 
4,270

 
958

Forward commitments to sell residential mortgage loans
Level 3
 

 
403

Commodity contracts
Level 2
 
17,619

 
1,269

Purchased options (time deposit)
Level 2
 
2,336

 
2,715

Liabilities:
 
 
 
 
 
Interest rate-related instruments
Level 2
 
$
59,255

 
$
30,886

Foreign currency exchange forwards
Level 2
 
3,073

 
1,398

Forward commitments to sell residential mortgage loans
Level 3
 
4,205

 

Commodity contracts
Level 2
 
17,138

 
1,146

Written options (time deposit)
Level 2
 
2,336

 
2,715

The table below presents a rollforward of the balance sheet amounts for the six months ended June 30, 2016 and the year ended December 31, 2015, 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, 2014
$
200

 
$
(488
)
Total net gains included in income:
 
 
 
Mortgage derivative gain

 
1,849

Balance December 31, 2015
$
200

 
$
1,361

Total net losses included in income:
 
 
 
Mortgage derivative loss

 
(1,296
)
Balance June 30, 2016
$
200

 
$
65

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2016, 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 significant unobservable input used in the fair value measurement of the Corporation’s mortgage derivative

35



interest rate lock commitments is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data, 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, 2016, the closing ratio was 82%.
Impaired loans:  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, resulting in an average discount of approximately 10%.
Mortgage servicing rights:  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, which were 15.8% and 9.6% at June 30, 2016, respectively. 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.
The table below presents the Corporation’s loans held for sale, impaired loans, and mortgage servicing rights measured at fair value on a nonrecurring basis as of June 30, 2016 and December 31, 2015, aggregated by the level in the fair value hierarchy within which those measurements fall.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
 
 
Income Statement Category of
Adjustment Recognized in Income
Adjustment Recognized in Income
($ in Thousands)
Fair Value Hierarchy
 
Fair Value
June 30, 2016
 
 
 
 
 
Assets:
 
 
 
Commercial loans held for sale
Level 2
 
$
30,694

Provision for credit losses
$
(451
)
Mortgage loans held for sale (1)
Level 2
 
259,054

Mortgage banking, net

Impaired loans (2)
Level 3
 
62,910

Provision for credit losses
(19,873
)
Mortgage servicing rights
Level 3
 
58,331

Mortgage banking, net
(2,120
)
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
Assets:
 
 
 
 
 
Loans held for sale
Level 2
 
$
124,915

Mortgage banking, net
$
(155
)
Impaired loans (2)
Level 3
 
41,891

Provision for credit losses
(7,796
)
Mortgage servicing rights
Level 3
 
70,686

Mortgage banking, net
425

(1)
Loans held for sale are carried at the lower of cost or estimated fair value. At June 30, 2016, the estimated fair value exceeded the cost and therefore there was no adjustment recognized in the Consolidated Statements of Income.
(2)
Represents individually evaluated impaired loans, net of the related allowance for loan losses.

Certain nonfinancial assets measured at fair value on a nonrecurring basis include other real estate owned (upon initial recognition or subsequent impairment), nonfinancial assets and nonfinancial liabilities measured at fair value 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.
During the first six months of 2016 and the full year 2015, 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

36



measurement. Other real estate owned measured at fair value upon initial recognition totaled approximately $5 million for the first six months of 2016 and $11 million for the year ended December 31, 2015, respectively. In addition to other real estate owned measured at fair value upon initial recognition, the Corporation also recorded write-downs to the balance of other real estate owned for subsequent impairment of $1 million and $3 million to foreclosure / OREO expense, net for the six months ended 2016 and the year ended December 31, 2015, respectively.
Fair Value of Financial Instruments:
The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Corporation’s financial instruments.
 
 
 
June 30, 2016
 
December 31, 2015
 
Fair Value Hierarchy Level
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
 
 
 
 
 
($ in Thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
Level 1
 
$
333,000

 
$
333,000

 
$
374,921

 
$
374,921

Interest-bearing deposits in other financial institutions
Level 1
 
131,680

 
131,680

 
79,764

 
79,764

Federal funds sold and securities purchased under agreements to resell
Level 1
 
13,200

 
13,200

 
19,000

 
19,000

Investment securities held to maturity
Level 2
 
1,236,140

 
1,278,855

 
1,168,230

 
1,184,442

Investment securities available for sale
Level 1
 
2,610

 
2,610

 
2,566

 
2,566

Investment securities available for sale
Level 2
 
4,798,956

 
4,798,956

 
4,964,648

 
4,964,648

Investment securities available for sale
Level 3
 
200

 
200

 
200

 
200

FHLB and Federal Reserve Bank stocks
Level 2
 
194,501

 
194,501

 
147,240

 
147,240

Loans held for sale
Level 2
 
284,376

 
289,748

 
124,915

 
124,915

Loans, net
Level 3
 
19,547,506

 
19,603,484

 
18,440,079

 
18,389,832

Bank owned life insurance
Level 2
 
582,580

 
582,580

 
583,019

 
583,019

Derivatives (trading and other assets)
Level 2
 
79,448

 
79,448

 
34,907

 
34,907

Derivatives (trading and other assets)
Level 3
 
4,270

 
4,270

 
1,361

 
1,361

Financial liabilities:
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand, savings, interest-bearing demand, and money market accounts
Level 3
 
$
18,728,818

 
$
18,728,818

 
$
19,444,863

 
$
19,444,863

Brokered CDs and other time deposits
Level 2
 
1,564,032

 
1,574,368

 
1,562,802

 
1,564,464

Short-term funding
Level 2
 
1,911,557

 
1,911,557

 
834,416

 
834,416

Long-term funding
Level 2
 
3,511,475

 
3,579,398

 
2,676,164

 
2,728,112

Standby letters of credit (1)
Level 2
 
2,759

 
2,759

 
2,954

 
2,954

Derivatives (trading and other liabilities)
Level 2
 
81,802

 
81,802

 
36,145

 
36,145

Derivatives (trading and other liabilities)
Level 3
 
4,205

 
4,205

 

 

(1)
The commitment on standby letters of credit was $285 million and $297 million at June 30, 2016 and December 31, 2015, respectively. See Note 12 for additional information on the standby letters of credit and for information on the fair value of lending-related commitments.
Cash and due from banks, interest-bearing deposits in other financial institutions, and federal funds sold and securities purchased under agreements to resell—For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Investment securities (held to maturity and available for sale)—The fair value of investment securities is based on quoted prices in active markets, or if quoted prices are not available for a specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.
FHLB and Federal Reserve Bank stocks—The carrying amount is a reasonable fair value estimate for the Federal Reserve Bank and FHLB stocks given their “restricted” nature (i.e., the stock can only be sold back to the respective institutions (FHLB or Federal Reserve Bank) or another member institution at par).
Loans held for sale—The fair value estimation process for the loans held for sale portfolio is segregated by loan type. The estimated fair value was based on what secondary markets are currently offering for portfolios with similar characteristics.

37



Loans, net—The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts the Corporation believes are consistent with liquidity discounts in the market place. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial and industrial, real estate construction, commercial real estate (owner occupied and investor), residential mortgage, home equity, and other consumer. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar maturities. The fair value analysis also included other assumptions to estimate fair value, intended to approximate those a market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, and credit spreads, as appropriate.
Bank owned life insurance—The fair value of bank owned life insurance approximates the carrying amount, because upon liquidation of these investments, the Corporation would receive the cash surrender value which equals the carrying amount.
Deposits—The fair value of deposits with no stated maturity such as noninterest-bearing demand, savings, interest-bearing demand, and money market accounts, is equal to the amount payable on demand as of the balance sheet date. The fair value of Brokered CDs and other time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. However, if the estimated fair value of Brokered CDs and other time deposits is less than the carrying value, the carrying value is reported as the fair value.
Short-term funding—The carrying amount is a reasonable estimate of fair value for existing short-term funding.
Long-term funding—Rates currently available to the Corporation for debt with similar terms and remaining maturities are used to estimate the fair value of existing long-term funding.
Standby letters of credit—The fair value of standby letters of credit represents deferred fees arising from the related off-balance sheet financial instruments. These deferred fees approximate the fair value of these instruments and are based on several factors, including the remaining terms of the agreement and the credit standing of the customer.
Derivatives (trading and other) - A detailed description the Corporation's derivative instruments can be found under the "Assets and Liabilities Measured at Fair Value on a Recurring Basis" section of this footnote.
Limitations—Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Note 14 Retirement Plans
The Corporation has a noncontributory defined benefit retirement plan (the Retirement Account Plan (“RAP”)) covering substantially all full-time employees. 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 healthcare access for eligible retired employees in its Postretirement Plan (the “Postretirement Plan”). Retirees who are at least 55 years of age with 5 years of service are eligible to participate in the Postretirement Plan. The Corporation has no plan assets attributable to the Postretirement Plan. The Corporation reserves the right to terminate or make changes to the Postretirement Plan at any time.

38



The components of net periodic benefit cost for the RAP and Postretirement Plans for three and six months ended June 30, 2016 and 2015 were as follows.
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2016
 
2015
2016
 
2015
 
($ in Thousands)
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
Pension Plan:
 
 
 
 
 
 
Service cost
$
1,725

 
$
3,062

$
3,450

 
$
6,125

Interest cost
1,780

 
1,643

3,560

 
3,285

Expected return on plan assets
(5,065
)
 
(5,350
)
(10,130
)
 
(10,700
)
Amortization of prior service cost
12

 
12

25

 
25

Amortization of actuarial loss
483

 
533

965

 
1,065

Total net periodic pension cost
$
(1,065
)
 
$
(100
)
$
(2,130
)
 
$
(200
)
Postretirement Plan:
 
 
 
 
 
 
Interest cost
$
36

 
$
35

$
72

 
$
70

Total net periodic benefit cost
$
36

 
$
35

$
72

 
$
70

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 2015 Annual Report on Form 10-K, with certain exceptions. The more significant of these exceptions are described herein.
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.
During 2015, the Corporation adopted enhanced FTP methodology utilizing, new, more granular deposit information which incorporated the additional dimension of vintage (based on time from when the deposit account was opened) for determining the funds credit for non-maturity deposits. The new deposit information demonstrated that deposit accounts with the Corporation for a longer period of time had a lower attrition rate, warranting a higher crediting rate (based on a longer-term segment of the yield curve) to reflect the long-term value such deposits provide to the Corporation.
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 2015 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.

39



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 2015 Annual Report on Form 10-K. There have been no changes in the Corporation's segments since December 31, 2015.
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).
Information about the Corporation’s segments is presented below.
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, 2016
 
 
 
 
 
 
 
Net interest income
$
159,233

 
$
170,574

 
$
18,897

 
$
348,704

Noninterest income
22,549

 
128,880

 
13,931

 
165,360

Total revenue
181,782

 
299,454

 
32,828

 
514,064

Credit provision*
27,853

 
12,388

 
(6,241
)
 
34,000

Noninterest expense
71,543

 
243,260

 
33,528

 
348,331

Income before income taxes
82,386

 
43,806

 
5,541

 
131,733

Income tax expense (benefit)
27,716

 
15,332

 
(2,940
)
 
40,108

Net income
$
54,670

 
$
28,474

 
$
8,481

 
$
91,625

Return on average allocated capital (ROCET1)**
10.5
%
 
9.1
%
 
3.7
%
 
9.2
%
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
Net interest income
$
151,846

 
$
173,742

 
$
8,713

 
$
334,301

Noninterest income
24,918

 
134,874

 
6,503

 
166,295

Total revenue
176,764

 
308,616

 
15,216

 
500,596

Credit provision*
19,460

 
13,663

 
(23,623
)
 
9,500

Noninterest expense
69,350

 
243,760

 
37,659

 
350,769

Income before income taxes
87,954

 
51,193

 
1,180

 
140,327

Income tax expense (benefit)
30,429

 
17,918

 
(4,092
)
 
44,255

Net income
$
57,525

 
$
33,275

 
$
5,272

 
$
96,072

Return on average allocated capital (ROCET1)**
12.1
%
 
10.4
%
 
2.4
%
 
10.4
%
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 2016
 
 
 
 
 
 
 
Average earning assets
$
9,924,378

 
$
9,222,677

 
$
6,473,156

 
$
25,620,211

Average loans
9,913,591

 
9,221,370

 
147,447

 
19,282,408

Average deposits
5,744,533

 
11,215,704

 
3,471,729

 
20,431,966

Average allocated capital (CET1)**
$
1,049,431

 
$
630,520

 
$
224,910

 
$
1,904,861

Average Balances for YTD June 2015
 
 
 
 
 
 
 
Average earning assets
$
9,321,388

 
$
8,618,054

 
$
6,268,081

 
$
24,207,523

Average loans
9,311,672

 
8,618,054

 
73,015

 
18,002,741

Average deposits
5,571,627

 
10,693,412

 
3,077,242

 
19,342,281

Average allocated capital (CET1)**
$
955,799

 
$
643,796

 
$
212,466

 
$
1,812,061


40



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, 2016
 
 
 
 
 
 
 
Net interest income
$
80,069

 
$
84,969

 
$
11,679

 
$
176,717

Noninterest income
10,936

 
65,132

 
6,100

 
82,168

Total revenue
91,005

 
150,101

 
17,779

 
258,885

Credit provision*
15,114

 
6,246

 
(7,360
)
 
14,000

Noninterest expense
37,140

 
121,965

 
15,255

 
174,360

Income before income taxes
38,751

 
21,890

 
9,884

 
70,525

Income tax expense
13,137

 
7,662

 
635

 
21,434

Net income
$
25,614

 
$
14,228

 
$
9,249

 
$
49,091

Return on average allocated capital (ROCET1)**
9.7
%
 
9.0
%
 
13.4
%
 
9.9
%
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
Net interest income
$
76,155

 
$
87,385

 
$
2,948

 
$
166,488

Noninterest income
12,305

 
69,530

 
4,647

 
86,482

Total revenue
88,460

 
156,915

 
7,595

 
252,970

Credit provision*
9,935

 
6,592

 
(11,527
)
 
5,000

Noninterest expense
34,889

 
125,387

 
16,501

 
176,777

Income before income taxes
43,636

 
24,936

 
2,621

 
71,193

Income tax expense (benefit)
15,061

 
8,728

 
(1,996
)
 
21,793

Net income
$
28,575

 
$
16,208

 
$
4,617

 
$
49,400

Return on average allocated capital (ROCET1)**
11.8
%
 
10.2
%
 
5.8
%
 
10.5
%
Segment Balance Sheet Data
 
 
 
 
 
 
 
($ in Thousands)
Corporate and
Commercial
Specialty
 
Community,
Consumer, and
Business
 
Risk Management
and Shared Services
 
Consolidated
Total
Average Balances for 2Q16
 
 
 
 
 
 
 
Average earning assets
$
10,128,726

 
$
9,325,036

 
$
6,514,287

 
$
25,968,049

Average loans
10,115,959

 
9,323,720

 
202,306

 
19,641,985

Average deposits
5,570,919

 
11,331,214

 
3,386,820

 
20,288,953

Average allocated capital (CET1)**
$
1,067,203

 
$
633,829

 
$
212,209

 
$
1,913,241

Average Balances for 2Q15
 
 
 
 
 
 
 
Average earning assets
$
9,422,805

 
$
8,709,691

 
$
6,133,871

 
$
24,266,367

Average loans
9,411,245

 
8,709,691

 
67,369

 
18,188,305

Average deposits
5,720,064

 
10,862,330

 
3,043,816

 
19,626,210

Average allocated capital (CET1)**
$
968,690

 
$
640,256

 
$
210,873

 
$
1,819,819

* The consolidated credit provision is equal to the actual reported provision for credit losses.
** The Federal Reserve establishes capital adequacy requirements for the Corporation, including Tier 1 capital. Tier 1 capital is comprised of common capital and certain redeemable, non-cumulative preferred stock. Average allocated capital represents average common equity Tier 1 which is defined as average Tier 1 capital excluding qualifying perpetual preferred stock and qualifying trust preferred securities. For segment reporting purposes, the ROCET1, a non-GAAP financial measure, reflects return on average allocated common equity Tier 1 (“CET1”). 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.

41



Note 16 Accumulated Other Comprehensive Income (Loss)
The following table summarizes the components of accumulated other comprehensive income (loss) at June 30, 2016 and 2015, changes during the three and six month periods then ended, and reclassifications out of accumulated other comprehensive income (loss) during the three and six month periods ended June 30, 2016 and 2015, respectively.
($ in Thousands)
Investments
Securities
Available
For Sale
 
Defined Benefit
Pension and
Post Retirement
Obligations
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance January 1, 2016
$
459

 
$
(33,075
)
 
$
(32,616
)
Other comprehensive income before reclassifications
82,743

 

 
82,743

Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
Investment securities gain, net
(6,214
)
 

 
(6,214
)
Personnel expense

 
990

 
990

Interest income (Amortization of net unrealized gains on available for sale securities transferred to held to maturity securities)
(3,024
)
 

 
(3,024
)
Income tax expense
(28,048
)
 
(378
)
 
(28,426
)
Net other comprehensive income during period
45,457

 
612

 
46,069

Balance June 30, 2016
$
45,916

 
$
(32,463
)
 
$
13,453

Balance January 1, 2015
$
18,512

 
$
(23,362
)
 
$
(4,850
)
Other comprehensive income before reclassifications
12,194

 

 
12,194

Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
Investment securities gain, net
(1,242
)
 

 
(1,242
)
Personnel expense

 
1,090

 
1,090

Income tax expense
(4,182
)
 
(416
)
 
(4,598
)
Net other comprehensive income during period
6,770

 
674

 
7,444

Balance June 30, 2015
$
25,282

 
$
(22,688
)
 
$
2,594

 
 
 
 
 
 
($ in Thousands)
Investments
Securities
Available
For Sale
 
Defined Benefit
Pension and
Post Retirement
Obligations
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance April 1, 2016
$
34,936

 
$
(32,769
)
 
$
2,167

Other comprehensive income before reclassifications
22,321

 

 
22,321

Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
Investment securities gain, net
(3,116
)
 

 
(3,116
)
Personnel expense

 
495

 
495

Interest income (Amortization of net unrealized gains on available for sale securities transferred to held to maturity securities)
(1,452
)
 

 
(1,452
)
Income tax expense
(6,773
)
 
(189
)
 
(6,962
)
Net other comprehensive income during period
10,980

 
306

 
11,286

Balance June 30, 2016
$
45,916

 
$
(32,463
)
 
$
13,453

Balance April 1, 2015
$
47,825

 
$
(23,025
)
 
$
24,800

Other comprehensive loss before reclassifications
(35,224
)
 

 
(35,224
)
Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
Investment securities gain, net
(1,242
)
 

 
(1,242
)
Personnel expense

 
545

 
545

Income tax (expense) benefit
13,923

 
(208
)
 
13,715

Net other comprehensive income (loss) during period
(22,543
)
 
337

 
(22,206
)
Balance June 30, 2015
$
25,282

 
$
(22,688
)
 
$
2,594


42



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, 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, 2015, 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 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.
Performance Summary
Average loans of $19.6 billion grew $719 million, or 4% from the first quarter, total commercial lending accounted for 75% of the quarter average loan growth. Average deposits of $20.3 billion declined $286 million, or 1% from the first quarter. For the remainder of 2016, the Corporation expects high single digit annual average loan growth and to maintain the loan to deposit ratio under 100%.
Net interest income of $177 million was $5 million, or 3% higher than the prior quarter. Net interest margin of 2.81% was stable with the first quarter. In the absence of Federal Reserve action to raise rates, the Corporation expects net interest margin to be approximately flat.
Provision for credit losses of $14 million was down $6 million from the first quarter. For the remainder of 2016, the Corporation expects the provision for loan losses will change based on loan growth and changes in risk grade or other indications of credit quality.
Noninterest income of $82 million decreased $1 million from the prior quarter. The Corporation expects noninterest income to be approximately flat to the prior year.
Noninterest expense of $174 million was flat from the prior quarter. The Corporation expects noninterest expense to be approximately flat to the prior year.
TABLE 1: Summary Results of Operations: Trends
(In thousands, except per share data)
 
YTD
Jun 2016
YTD
Jun 2015
2nd Qtr 2016
1st Qtr
2016
4th Qtr 2015
3rd Qtr 2015
2nd Qtr 2015
Net income
$
91,625

$
96,072

$
49,091

$
42,534

$
42,791

$
49,438

$
49,400

Net income available to common equity
$
87,258

$
93,299

$
46,922

$
40,336

$
40,593

$
47,254

$
47,855

Earnings per common share - basic
$
0.58

$
0.62

$
0.31

$
0.27

$
0.27

$
0.31

$
0.32

Earnings per common share - diluted
$
0.58

$
0.61

$
0.31

$
0.27

$
0.27

$
0.31

$
0.31

Effective tax rate
30.45
%
31.54
%
30.39
%
30.51
%
26.82
%
30.36
%
30.61
%


43



INCOME STATEMENT ANALYSIS

Net Interest Income

TABLE 2: Net Interest Income Analysis
 
Six months ended June 30,
 
2016
 
2015
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield /
Rate
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield /
Rate
 
($ in Thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans:(1)(2)(3)
 
 
 
 
 
 
 
 
 
 
 
Commercial and business lending
$
7,297,847

 
$
116,310

 
3.20
%
 
$
7,080,723

 
$
112,244

 
3.19
%
Commercial real estate lending
4,561,821

 
79,158

 
3.49
%
 
4,125,972

 
72,091

 
3.52
%
Total commercial
11,859,668

 
195,468

 
3.31
%
 
11,206,695

 
184,335

 
3.32
%
Residential mortgage
6,025,102

 
96,130

 
3.19
%
 
5,321,942

 
87,919

 
3.31
%
Retail
1,397,638

 
33,054

 
4.74
%
 
1,474,104

 
33,938

 
4.62
%
Total loans
19,282,408

 
324,652

 
3.38
%
 
18,002,741

 
306,192

 
3.42
%
Investment securities:
   
 
   
 
 
 
   
 
   
 
 
Taxable
5,000,754

 
49,786

 
1.99
%
 
4,782,809

 
48,960

 
2.05
%
Tax-exempt(1)
1,054,731

 
24,057

 
4.56
%
 
946,161

 
23,642

 
5.00
%
Other short-term investments
282,318

 
2,385

 
1.70
%
 
475,812

 
3,463

 
1.46
%
Investments and other
6,337,803

 
76,228

 
2.41
%
 
6,204,782

 
76,065

 
2.45
%
Total earning assets
25,620,211

 
$
400,880

 
3.14
%
 
24,207,523

 
$
382,257

 
3.17
%
Other assets, net
2,450,451

 
   
 
   
 
2,458,235

 
 
 
 
Total assets
$
28,070,662

 
   
 
   
 
$
26,665,758

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
   
 
   
 
 
 
   
 
   
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings
$
1,406,333

 
$
464

 
0.07
%
 
$
1,315,250

 
$
497

 
0.08
%
Interest-bearing demand
3,430,571

 
4,176

 
0.24
%
 
3,227,593

 
2,087

 
0.13
%
Money market
9,062,514

 
12,753

 
0.28
%
 
8,878,663

 
7,873

 
0.18
%
Time
1,549,351

 
6,051

 
0.79
%
 
1,612,312

 
5,303

 
0.66
%
Total interest-bearing deposits
15,448,769

 
23,444

 
0.31
%
 
15,033,818

 
15,760

 
0.21
%
Federal funds purchased and securities sold under agreements to repurchase
617,007

 
674

 
0.22
%
 
623,984

 
466

 
0.15
%
Other short-term funding
993,704

 
1,360

 
0.28
%
 
178,173

 
196

 
0.22
%
Total short-term funding
1,610,711

 
2,034

 
0.25
%
 
802,157

 
662

 
0.17
%
Long-term funding
2,817,560

 
16,428

 
1.17
%
 
3,402,382

 
21,514

 
1.27
%
Total short and long-term funding
4,428,271

 
18,462

 
0.84
%
 
4,204,539

 
22,176

 
1.06
%
Total interest-bearing liabilities
19,877,040

 
$
41,906

 
0.42
%
 
19,238,357

 
$
37,936

 
0.40
%
Noninterest-bearing demand deposits
4,983,197

 
 
 
 
 
4,308,463

 
 
 
 
Other liabilities
230,528

 
   
 
   
 
259,160

 
 
 
 
Stockholders’ equity
2,979,897

 
   
 
   
 
2,859,778

 
 
 
 
Total liabilities and stockholders’ equity
$
28,070,662

 
   
 
 
 
$
26,665,758

 
 
 
 
Interest rate spread
 
 
 
 
2.72
%
 
 
 
 
 
2.77
%
Net free funds
 
 
 
 
0.09
%
 
 
 
 
 
0.09
%
Fully tax-equivalent net interest income and net interest margin
 
 
$
358,974

 
2.81
%
 
 
 
$
344,321

 
2.86
%
Fully tax-equivalent adjustment
 
 
10,270

 
   
 
 
 
10,020

 
 
Net interest income
 
 
$
348,704

 
   
 
 
 
$
334,301

 
 


44



 
Quarter ended
 
June 30, 2016
 
March 31, 2016
 
June 30, 2015
 
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:(1)(2)(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and business lending
$
7,474,633

 
$
59,052

 
3.18
%
 
$
7,121,061

 
$
57,258

 
3.23
%
 
$
7,167,315

 
$
56,329

 
3.15
%
Commercial real estate lending
4,654,111

 
40,169

 
3.47
%
 
4,469,531

 
38,989

 
3.51
%
 
4,148,955

 
35,688

 
3.45
%
Total commercial
12,128,744

 
99,221

 
3.29
%
 
11,590,592

 
96,247

 
3.34
%
 
11,316,270

 
92,017

 
3.26
%
Residential mortgage
6,129,924

 
48,382

 
3.16
%
 
5,920,280

 
47,748

 
3.23
%
 
5,411,193

 
44,447

 
3.29
%
Retail
1,383,317

 
16,414

 
4.75
%
 
1,411,958

 
16,640

 
4.72
%
 
1,460,842

 
16,857

 
4.62
%
Total loans
19,641,985

 
164,017

 
3.35
%
 
18,922,830

 
160,635

 
3.41
%
 
18,188,305

 
153,321

 
3.38
%
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
4,967,437

 
24,270

 
1.95
%
 
5,034,072

 
25,516

 
2.03
%
 
4,761,445

 
23,868

 
2.01
%
Tax-exempt(1)
1,064,252

 
12,077

 
4.54
%
 
1,045,210

 
11,980

 
4.58
%
 
942,032

 
11,575

 
4.92
%
Other short-term investments
294,375

 
1,318

 
1.80
%
 
270,261

 
1,067

 
1.59
%
 
374,585

 
1,771

 
1.89
%
Investments and other
6,326,064

 
37,665

 
2.38
%
 
6,349,543

 
38,563

 
2.43
%
 
6,078,062

 
37,214

 
2.45
%
Total earning assets
25,968,049

 
$
201,682

 
3.12
%
 
25,272,373

 
$
199,198

 
3.16
%
 
24,266,367

 
$
190,535

 
3.15
%
Other assets, net
2,674,427

 
 
 
 
 
2,426,475

 
 
 
 
 
2,461,765

 
 
 
 
Total assets
$
28,642,476

 
 
 
 
 
$
27,698,848

 
 
 
 
 
$
26,728,132

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings
$
1,445,020

 
$
228

 
0.06
%
 
$
1,367,646

 
$
236

 
0.07
%
 
$
1,352,616

 
$
259

 
0.08
%
Interest-bearing demand
3,640,733

 
2,144

 
0.24
%
 
3,220,409

 
2,032

 
0.25
%
 
3,251,196

 
1,037

 
0.13
%
Money market
8,692,782

 
6,309

 
0.29
%
 
9,432,245

 
6,444

 
0.27
%
 
9,101,589

 
4,088

 
0.18
%
Time
1,540,424

 
2,997

 
0.78
%
 
1,558,278

 
3,054

 
0.79
%
 
1,630,242

 
2,757

 
0.68
%
Total interest-bearing deposits
15,318,959

 
11,678

 
0.31
%
 
15,578,578

 
11,766

 
0.30
%
 
15,335,643

 
8,141

 
0.21
%
Federal funds purchased and securities sold under agreements to repurchase
674,360

 
378

 
0.23
%
 
559,459

 
296

 
0.21
%
 
662,047

 
235

 
0.14
%
Other short-term funding
1,209,511

 
845

 
0.28
%
 
777,898

 
515

 
0.27
%
 
236,459

 
115

 
0.20
%
Total short-term funding
1,883,871

 
1,223

 
0.26
%
 
1,337,357

 
811

 
0.24
%
 
898,506

 
350

 
0.16
%
Long-term funding
3,052,581

 
6,923

 
0.91
%
 
2,582,538

 
9,505

 
1.47
%
 
3,077,012

 
10,642

 
1.38
%
Total short and long-term funding
4,936,452

 
8,146

 
0.66
%
 
3,919,895

 
10,316

 
1.05
%
 
3,975,518

 
10,992

 
1.11
%
Total interest-bearing liabilities
20,255,411

 
$
19,824

 
0.39
%
 
19,498,473

 
$
22,082

 
0.45
%
 
19,311,161

 
$
19,133

 
0.40
%
Noninterest-bearing demand deposits
4,969,994

 
 
 
 
 
4,996,596

 
 
 
 
 
4,290,567

 
 
 
 
Other liabilities
228,027

 
 
 
 
 
233,029

 
 
 
 
 
251,743

 
 
 
 
Stockholders’ equity
3,189,044

 
 
 
 
 
2,970,750

 
 
 
 
 
2,874,661

 
 
 
 
Total liabilities and stockholders’ equity
$
28,642,476

 
 
 
 
 
$
27,698,848

 
 
 
 
 
$
26,728,132

 
 
 
 
Interest rate spread
 
 
 
 
2.73
%
 
 
 
 
 
2.71
%
 
 
 
 
 
2.75
%
Net free funds
 
 
 
 
0.08
%
 
 
 
 
 
0.10
%
 
 
 
 
 
0.08
%
Fully tax-equivalent net interest income and net interest margin
 
 
$
181,858

 
2.81
%
 
 
 
$
177,116

 
2.81
%
 
 
 
$
171,402

 
2.83
%
Fully tax-equivalent adjustment
 
 
5,141

 
 
 
 
 
5,129

 
 
 
 
 
4,914

 
 
Net interest income
 
 
$
176,717

 
 
 
 
 
$
171,987

 
 
 
 
 
$
166,488

 
 

(1)
The yield on tax-exempt loans and securities is computed on a fully tax-equivalent basis using a tax rate of 35% for all periods presented and is net of the effects of certain disallowed interest deductions.
(2)
Nonaccrual loans and loans held for sale have been included in the average balances.
(3)
Interest income includes net loan fees.

Notable contributions to the change in net interest income were:

Net interest income in the consolidated statements of income (which excludes the fully tax-equivalent adjustment) was $349 million for the first six months of 2016 compared to $334 million for the first six months of 2015. See sections “Interest Rate Risk” and “Quantitative and Qualitative Disclosures about Market Risk” for a discussion of interest rate risk and market risk.


45



Fully tax-equivalent net interest income of $359 million for the first six months of 2016 was $15 million higher than the first six months of 2015. The increase in fully tax-equivalent net interest income was attributable to a favorable volume variance (as balance sheet changes in both volume and mix increased fully tax-equivalent net interest income by $25 million) and a $1 million day variance (one additional day in the first half of 2016), partially offset by an unfavorable rate variance (as the impact of changes in the interest rate environment and product pricing decreased fully tax-equivalent net interest income by $11 million).

Average earning assets of $25.6 billion for the first six months of 2016 were $1.4 billion, or 6% higher than the first six months of 2015. Average loans increased $1.3 billion, or 7%, primarily due to a $703 million increase in residential mortgage loans and a $653 million increase in commercial loans. Average securities and short-term investments increased $133 million, primarily due to a $220 million increase in mortgage-related securities and a $109 million increase in municipal securities, partially offset by a $196 million decrease in interest-bearing deposits in other banks.

Average interest-bearing liabilities of $19.9 billion for the first six months of 2016 were up $639 million, or 3% versus the first six months of 2015. On average, interest-bearing deposits increased $415 million and noninterest-bearing demand deposits (a principal component of net free funds) increased $675 million. On average, short and long-term funding increased $224 million compared to the first six months of 2015, including a $809 million increase in short-term funding, partially offset by a $585 million decrease in long-term funding. The Corporation redeemed $430 million of senior notes in February 2016.

The net interest margin for the first six months of 2016 was 2.81%, compared to 2.86% for the first six months of 2015. The 5 basis points ("bp") decline in net interest margin was attributable to a 5 bp decrease in interest rate spread (the net of a 3 bp decrease in the yield on earning assets and a 2 bp increase in the cost of interest-bearing liabilities). The net free funds benefit remained level at 9bp.

For the first six months of 2016, loan yields decreased 4 bp to 3.38%, due to competitive pricing pressures in this low interest rate environment. The yield on investment securities and other short-term investments decreased 4 bp to 2.41%, and was also impacted by the low interest rate environment and higher prepayment speeds of mortgage-related securities purchased at a premium.

The cost of interest-bearing liabilities was 0.42% for the first six months of 2016, 2 bp higher than the first six months of 2015. The increase was due to a 10 bp increase in the average cost of interest-bearing deposits (to 0.31%) and an 8 bp increase in the cost of short-term funding (to 0.25%), both primarily due to the December 2015 Federal Reserve interest rate change; partially offset by a 10 bp decrease in the cost of long-term funding (to 1.17%), primarily due to the early redemption of $430 million of senior notes in February 2016.
At the end of the second quarter of 2016, the Federal funds rate was below 0.50% after a target rate increase in December 2015. If the Federal Reserve decides to increase rates later this year, the timing and magnitude of any such increases is uncertain and will likely depend on domestic and global economic conditions, among other factors.
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, 2016 was $34 million, compared to $10 million for the six months ended June 30, 2015. Net charge offs were $37 million (representing 0.39% of average loans) for the six months ended June 30, 2016, compared to $14 million (representing 0.16% of average loans) for the six months ended June 30, 2015. The ratio of the allowance for loan losses to total loans was 1.35% and 1.43% at June 30, 2016 and 2015, respectively.
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,” “Nonaccrual Loans, Potential Problem Loans, and Other Real Estate Owned,” and “Allowance for Credit Losses."

46



Noninterest Income
TABLE 3: Noninterest Income
 
 
 
 
 
 
 
 
 
2Q16 Change vs
($ in Thousands)
YTD
2016
YTD
2015
YTD
Change
2Q16
1Q16
4Q15
3Q15
2Q15
1Q16
2Q15
Trust service fees
$
22,956

$
24,602

(7
)%
$
11,509

$
11,447

$
11,965

$
12,273

$
12,515

1
 %
(8
)%
Service charges on deposit accounts
32,717

31,509

4
 %
16,444

16,273

16,577

17,385

15,703

1
 %
5
 %
Card-based and other nondeposit fees
24,708

26,013

(5
)%
12,717

11,991

12,694

12,618

13,597

6
 %
(6
)%
Insurance commissions
43,387

39,805

9
 %
22,005

21,382

17,997

17,561

20,077

3
 %
10
 %
Brokerage and annuity commissions
7,892

7,875

 %
4,098

3,794

3,694

3,809

4,192

8
 %
(2
)%
Subtotal ("fee-based revenue")
131,660

129,804

1
 %
66,773

64,887

62,927

63,646

66,084

3
 %
1
 %
Mortgage banking income
16,287

23,031

(29
)%
8,300

7,987

10,851

9,557

12,201

4
 %
(32
)%
Mortgage servicing rights expense
8,016

5,682

41
 %
4,233

3,783

2,580

2,914

2,260

12
 %
87
 %
Mortgage banking, net
8,271

17,349

(52
)%
4,067

4,204

8,271

6,643

9,941

(3
)%
(59
)%
Capital market fees, net
7,331

5,159

42
 %
3,793

3,538

3,423

2,170

2,692

7
 %
41
 %
Bank owned life insurance income
7,743

5,256

47
 %
2,973

4,770

2,092

2,448

2,381

(38
)%
25
 %
Other
3,960

4,798

(17
)%
1,789

2,171

2,580

2,118

2,288

(18
)%
(22
)%
Subtotal (“fee income”)
158,965

162,366

(2
)%
79,395

79,570

79,293

77,025

83,386

 %
(5
)%
Asset gains (losses), net
181

2,687

(93
)%
(343
)
524

(391
)
244

1,854

(165
)%
(119
)%
Investment securities gains, net
6,214

1,242

400
 %
3,116

3,098

4,095

2,796

1,242

1
 %
151
 %
Total noninterest income
$
165,360

$
166,295

(1
)%
$
82,168

$
83,192

$
82,997

$
80,065

$
86,482

(1
)%
(5
)%
Mortgage loans originated for sale during period
$
517,838

$
619,202

(16
)%
$
323,989

$
193,849

$
316,973

$
291,931

$
350,906

67
 %
(8
)%
Trust assets under management, at market value
$
7,944,187

$
8,068,241

(2
)%
$
7,944,187

$
7,843,512

$
7,729,131

$
7,625,613

$
8,068,241

1
 %
(2
)%
 
 
 
 
 
 
 
 
 
 
 
Notable contributions to the change in noninterest income were:
Fee-based revenue was $132 million, an increase of $2 million (1%) compared to the six months ended June 30, 2015. Within fee-based revenue, increases in insurance commissions and service charges on deposit accounts were partially offset by decreases in trust service fees and card-based and other nondeposit fees.
Net mortgage banking income for the first half of 2016 was $8 million, down $9 million (52%) compared to the first half of 2015. Net mortgage banking consists of gross mortgage banking income less mortgage servicing rights expense. Gross mortgage banking income includes servicing fees, the gain or loss on sales of mortgage loans to the secondary market, changes to the mortgage repurchase reserve, and the fair value adjustments on the mortgage derivatives. Gross mortgage banking income decreased $7 million, primarily due to a $6 million unfavorable change in the fair value of mortgage derivatives.
Mortgage servicing rights expense includes both the amortization of the mortgage servicing rights asset and changes to the valuation allowance associated with the mortgage servicing rights asset. Mortgage servicing rights expense is affected by the size of the servicing portfolio, as well as the changes in the estimated fair value of the mortgage servicing rights asset. Mortgage servicing rights expense was $8 million for the six months ended June 30, 2016, up $2 million (41%) compared to the six months ended June 30, 2015. The increase in mortgage servicing rights expense was primarily due to a $2 million addition to the valuation reserve for the first half of 2016 compared to a slight recovery during the first half of 2015, reflecting lower interest rates at June 30, 2016. See section “Critical Accounting Policies," in the Corporation’s 2015 Annual Report on Form 10-K, Note 8, “Goodwill and Intangible Assets,” and Note 13, “Fair Value Measurements,” of the notes to consolidated financial statements for additional disclosure.
Net investment securities gains of $6 million and $1 million for the six months ended June 30, 2016 and 2015, respectively, due to the sale of FNMA and FHLMC mortgage-related securities into GNMA mortgage-related securities. See Note 6,

47



"Investment Securities" of the notes to consolidated financial statements for additional information on the investment securities portfolio.
Net asset gains for the first six months of 2016 were minimal. Net asset gains of $3 million for the first six months of 2015 were primarily due to the gain on sales of alternative equity investments.
Noninterest Expense
TABLE 4: Noninterest Expense
 
YTD
2016
YTD
2015
YTD Change
 
 
 
 
 
2Q16 Change vs
($ in Thousands)
2Q16
1Q16
4Q15
3Q15
2Q15
1Q16
2Q15
Personnel expense
$
203,527

$
203,138

 %
$
102,129

$
101,398

$
100,469

$
101,134

$
102,986

1
 %
(1
)%
Occupancy
27,017

31,991

(16
)%
13,215

13,802

14,718

14,187

14,308

(4
)%
(8
)%
Equipment
10,842

11,511

(6
)%
5,396

5,446

5,695

6,003

5,739

(1
)%
(6
)%
Technology
28,714

31,912

(10
)%
14,450

14,264

13,953

14,748

16,354

1
 %
(12
)%
Business development and advertising
14,802

12,156

22
 %
6,591

8,211

7,652

5,964

6,829

(20
)%
(3
)%
Other intangible amortization, net
1,043

1,689

(38
)%
539

504

520

885

888

7
 %
(39
)%
Loan expense
6,663

6,677

 %
3,442

3,221

4,120

3,305

3,681

7
 %
(6
)%
Legal and professional fees
9,881

8,882

11
 %
4,856

5,025

3,963

4,207

4,344

(3
)%
12
 %
Foreclosure / OREO expense
3,207

2,426

32
 %
1,330

1,877

2,371

645

1,264

(29
)%
5
 %
FDIC expense
16,500

12,500

32
 %
8,750

7,750

7,500

6,000

6,000

13
 %
46
 %
Other
26,135

27,887

(6
)%
13,662

12,473

15,032

14,507

14,384

10
 %
(5
)%
Total noninterest expense
$
348,331

$
350,769

(1
)%
$
174,360

$
173,971

$
175,993

$
171,585

$
176,777

 %
(1
)%
Average full-time equivalent employees
4,394

4,443

 
4,415
4,374
4,378
4,421
4,465
 
 
Notable contributions to the change in noninterest expense were:
Personnel expense (which includes salary-related expenses and fringe benefit expenses) was $204 million for the six months ended June 30, 2016, relatively unchanged from the six months ended June 30, 2015.
Nonpersonnel noninterest expenses on a combined basis were $145 million, down $3 million (2%) compared to the first half of 2015. Occupancy expense was down $5 million (16%), primarily attributable to a lease termination charge incurred in the first quarter of 2015. Technology expense was down $3 million (10%) from the six months ended June 30, 2015, primarily driven by a reduction in external technology support services. FDIC expense was $4 million (32%) higher compared to the first half of 2015, reflecting growth in criticized and risk-weighted assets. All remaining noninterest expense categories on a combined basis were up $1 million (2%) .
Income Taxes

The Corporation recognized income tax expense of $40 million for the six months ended June 30, 2016 compared to income tax expense of $44 million for the six months ended 2015. The change in income tax expense was primarily due to the decrease in the level of pretax income between the years. The effective tax rate was 30.45% for the six months ended June 30, 2016, compared to an effective tax rate of 31.54% for the six months ended 2015.

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 2015 Annual Report on Form 10-K for additional information on income taxes.

48



BALANCE SHEET ANALYSIS
At June 30, 2016, total assets were $29.0 billion, up $1.3 billion (5%) from December 31, 2015 and up $1.9 billion (7%) from June 30, 2015.
Loans of $19.8 billion at June 30, 2016 were up $1.1 billion (6%) from December 31, 2015 and were up $1.5 billion (8%) from June 30, 2015. See section "Loans" for additional information on loans.
Investment securities were $6.0 billion at June 30, 2016, down $98 million (2%) from year-end 2015 and up $98 million (2%) from June 30, 2015.
Premises and equipment, net of $331 million increased $64 million (24%) from December 31, 2015 and increased $57 million (21%) from June 30, 2015, primarily due to the purchase of the Milwaukee Center.
At June 30, 2016, total deposits of $20.3 billion were down $715 million (3%) from December 31, 2015 and were up $1.0 billion (5%) from June 30, 2015. See section "Deposits and Customer Funding" for additional information on deposits.
Short and long-term funding of $5.4 billion at June 30, 2016 increased $1.9 billion (54%) since year-end 2015, primarily due to increases of $991 million and $1.3 billion in short and long-term FHLB Advances, respectively. This was partially offset by the redemption of $430 million in senior notes in February 2016.
Loans
TABLE 5: Period End Loan Composition
 
 
 
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
June 30, 2015
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
($ in Thousands)
Commercial and industrial
$
6,701,986

 
34
%
 
$
6,511,648

 
34
%
 
$
6,190,683

 
33
%
 
$
6,128,080

 
33
%
 
$
6,255,092

 
34
%
Commercial real estate — owner occupied
921,736

 
5

 
917,285

 
5

 
918,212

 
5

 
966,689

 
5

 
978,183

 
5

Commercial and business lending
7,623,722

 
39

 
7,428,933

 
39

 
7,108,895

 
38

 
7,094,769

 
38

 
7,233,275

 
39

Commercial real estate — investor
3,495,791

 
18

 
3,276,733

 
17

 
3,234,266

 
17

 
3,183,352

 
17

 
3,126,440

 
17

Real estate construction
1,285,573

 
6

 
1,184,398

 
6

 
1,162,145

 
6

 
1,124,280

 
6

 
1,092,308

 
6

Commercial real estate lending
4,781,364

 
24

 
4,461,131

 
23

 
4,396,411

 
23

 
4,307,632

 
23

 
4,218,748

 
23

Total commercial
12,405,086

 
63

 
11,890,064

 
62

 
11,505,306

 
61

 
11,402,401

 
61

 
11,452,023

 
62

Residential mortgage
6,035,720

 
30

 
5,944,457

 
31

 
5,783,267

 
31

 
5,682,178

 
31

 
5,398,434

 
30

Home equity revolving lines of credit
861,311

 
4

 
867,860

 
4

 
883,759

 
5

 
883,573

 
5

 
880,628

 
5

Home equity loans junior liens
107,460

 
1

 
115,134

 
1

 
122,043

 
1

 
130,892

 
1

 
141,344

 
1

Home equity
968,771

 
5

 
982,994

 
5

 
1,005,802

 
6

 
1,014,465

 
6

 
1,021,972

 
6

Other consumer
405,709

 
2

 
409,725

 
2

 
419,968

 
2

 
425,729

 
2

 
430,823

 
2

Total consumer
7,410,200

 
37

 
7,337,176

 
38

 
7,209,037

 
39

 
7,122,372

 
39

 
6,851,229

 
38

Total loans
$
19,815,286

 
100
%
 
$
19,227,240

 
100
%
 
$
18,714,343

 
100
%
 
$
18,524,773

 
100
%
 
$
18,303,252

 
100
%
Commercial real estate - investor and Real estate construction loan detail:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Farmland
$
6,181

 
%
 
$
5,557

 
%
 
$
7,135

 
%
 
$
9,645

 
%
 
$
9,590

 
%
Multi-family
1,076,549

 
31

 
974,051

 
30

 
932,360

 
29

 
921,456

 
29

 
902,680

 
29

Non-owner occupied
2,413,061

 
69

 
2,297,125

 
70

 
2,294,771

 
71

 
2,252,251

 
71

 
2,214,170

 
71

Commercial real estate — investor
$
3,495,791

 
100
%
 
$
3,276,733

 
100
%
 
$
3,234,266

 
100
%
 
$
3,183,352

 
100
%
 
$
3,126,440

 
100
%
1-4 family construction
$
353,244

 
27
%
 
$
320,984

 
27
%
 
$
309,396

 
27
%
 
$
315,538

 
28
%
 
$
318,222

 
29
%
All other construction
932,329

 
73

 
863,414

 
73

 
852,749

 
73

 
808,742

 
72

 
774,086

 
71

Real estate construction
$
1,285,573

 
100
%
 
$
1,184,398

 
100
%
 
$
1,162,145

 
100
%
 
$
1,124,280

 
100
%
 
$
1,092,308

 
100
%

49



Commercial and business loans were $7.6 billion and represented 39% of total loans at June 30, 2016, an increase of $515 million (7%) from December 31, 2015 and an increase of $390 million (5%) from June 30, 2015.
Commercial real estate lending totaled $4.8 billion at June 30, 2016 and represented 24% of total loans, an increase of $385 million (9%) from December 31, 2015 and an increase of $563 million (13%) from June 30, 2015.
Consumer loans were $7.4 billion and represented 37% of total loans at June 30, 2016, an increase of $201 million (3%) from December 31, 2015 and an increase of $559 million (8%) from June 30, 2015.

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 2015 and the first half of 2016. 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.
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.
Commercial and business lending:
The commercial and business lending classification primarily includes commercial loans to large corporations, middle market companies and small businesses and lease financing. At June 30, 2016, the largest industry group within the commercial and business lending category was the manufacturing sector which represented 7% of total loans and 18% of the total commercial and business lending portfolio. The next largest industry group within the commercial and business lending category included the finance and insurance portfolio, which represented 5% of total loans and represented 13% of the total commercial and business lending portfolio, followed by power and utilities portfolio, which represented 4% of total loans and represented 11% of the total commercial and business lending portfolio and the oil and gas portfolio, which represented 4% of total loans and represented 10% of the total commercial and business lending portfolio at June 30, 2016. The remaining commercial and business lending portfolio is spread over a diverse range of industries, none of which exceed 4% of total loans. 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. 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 diverse by product line with approximately 60% in oil and 40% in gas at June 30, 2016. 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.


50



The following table summarizes information about the Corporation's oil and gas loan portfolio.
TABLE 6: Oil and Gas Loan Portfolio
 
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
June 30, 2015
 
($ in Millions)
Pass
$
387

 
$
402

 
$
522

 
$
587

 
$
658

Special mention
64

 
75

 
86

 
74

 
28

Potential problem
176

 
150

 
124

 
84

 
60

Nonaccrual
129

 
129

 
20

 
13

 
11

Total oil and gas related loans
$
756

 
$
756

 
$
752

 
$
758

 
$
757

Oil and gas related allowance
$
42

 
$
49

 
$
42

 
$
29

 
$
26

Oil and gas related allowance ratio
5.6
%
 
6.5
%
 
5.6
%
 
3.8
%
 
3.4
%
The Corporation proactively risk grades and reserves accordingly against the oil and gas loan portfolio. Lower market pricing and increased market volatility has led to downward migration within the portfolio. At June 30, 2016, nonaccrual oil and gas related loans totaled approximately $129 million, representing 17% of the oil and gas loan portfolio, an increase of $109 million from December 31, 2015. Potential problem oil and gas related loans totaled approximately $176 million at June 30, 2016, compared to $124 million at December 31, 2015. The increase in nonaccrual and potential problem oil and gas related loans was primarily due to downgrades associated with the issuance of revised regulatory guidance, as well as the negative outlook for a near term oil and gas price recovery. The allowance for loan losses on oil and gas related loans was $42 million at both June 30, 2016 and December 31, 2015.
Commercial real estate lending:
Commercial real estate lending primarily includes commercial-based loans to investors that are secured by commercial income properties or multi-family projects. Commercial real estate loans are typically intermediate to long-term financings. 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.
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 which 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.


51



TABLE 7: Commercial Loan Maturity Distribution and Interest Rate Sensitivity
  
Maturity (1)
June 30, 2016
Within 1 Year (2)
 
1-5 Years
 
After 5 Years
 
Total
 
% of Total
 
($ in Thousands)
Commercial and industrial
$
5,649,659

 
$
779,935

 
$
272,392

 
$
6,701,986

 
54
%
Commercial real estate — investor
1,977,487

 
1,414,745

 
103,559

 
3,495,791

 
28
%
Commercial real estate — owner occupied
332,292

 
452,495

 
136,949

 
921,736

 
8
%
Real estate construction
985,148

 
285,345

 
15,080

 
1,285,573

 
10
%
Total
$
8,944,586

 
$
2,932,520

 
$
527,980

 
$
12,405,086

 
100
%
Fixed rate
$
3,938,283

 
$
964,670

 
$
266,918

 
$
5,169,871

 
42
%
Floating or adjustable rate
5,006,303

 
1,967,850

 
261,062

 
7,235,215

 
58
%
Total
$
8,944,586

 
$
2,932,520

 
$
527,980

 
$
12,405,086

 
100
%
Percent by maturity distribution
72
%
 
24
%
 
4
%
 
100
%
 
 
(1)
Based upon scheduled principal repayments.
(2)
Demand loans, past due loans, and overdrafts are reported in the “Within 1 Year” category.

The total commercial loans that were floating or adjustable rate was $7.2 billion (58%) at June 30, 2016. Including the $3.9 billion of fixed rate loans due within one year, 90% of the commercial loan portfolio noted above matures, re-prices, or resets within one year. Of the fixed rate loans due within one year, 95% have an original maturity within one year.
Residential mortgage:
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, 2016, the residential mortgage portfolio was comprised of $1.6 billion of fixed-rate residential real estate mortgages and $4.4 billion of variable-rate residential real estate mortgages, compared to $1.6 billion of fixed-rate mortgages and $4.2 billion variable-rate mortgages at December 31, 2015. The residential mortgage portfolio is focused primarily in our three-state branch footprint, with approximately 90% of the outstanding loan balances in our branch footprint at June 30, 2016. 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 are sold in the secondary market with servicing rights retained. 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. The Corporation may retain certain fixed-rate residential real estate mortgages in its loan portfolio, including some jumbo mortgages and CRA-related mortgages.
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.
Home equity:
Home equity consists of both home equity lines of credit and closed-end home equity loans, approximately 21% are first lien positions. Home equity loans and lines in a junior position at June 30, 2016 included approximately 42% for which the Corporation also owned or serviced the related first lien loan and approximately 58% where the Corporation did not service the related first lien loan.
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 LTV of the property securing the loan. Currently, for home equity products, the maximum acceptable LTV is 90% for customers with FICO scores exceeding 700. Home equity loans generally have a 20 year term and are fixed rate with principal and interest payments required, while home equity lines are generally tied to floating rate indices.

52



Based upon outstanding balances at June 30, 2016, the following table presents the periods when home equity lines of credit revolving periods are scheduled to end.
TABLE 8: Home Equity Line of Credit - Revolving Period End Dates
 
$ in Thousands
 
% to Total
Less than 5 years
$
41,210

 
5
%
5 — 10 years
215,054

 
25
%
Over 10 years
605,047

 
70
%
Total home equity revolving lines of credit
$
861,311

 
100
%

Other consumer:
Other consumer consists of student loans, as well as short-term and other personal installment loans and credit cards. The Corporation had $229 million and $249 million of student loans at June 30, 2016, and December 31, 2015, 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 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.
The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas within our 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, 2016, no significant concentrations existed in the Corporation’s portfolio in excess of 10% of total loans.

53



Nonaccrual Loans, Potential Problem Loans, and Other Real Estate Owned
Management is committed to a proactive nonaccrual and potential 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 9 provides detailed information regarding nonperforming assets, which include nonaccrual loans and other real estate owned.
TABLE 9: Nonperforming Assets
 
 
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
 
June 30,
2015
 
($ in Thousands)
Nonperforming assets:
 
Commercial and industrial
$
193,439

 
$
197,115

 
$
93,575

 
$
60,184

 
$
66,394

Commercial real estate — owner occupied
9,635

 
9,443

 
8,049

 
13,368

 
18,821

Commercial and business lending
203,074

 
206,558

 
101,624

 
73,552

 
85,215

Commercial real estate — investor
11,528

 
12,330

 
8,643

 
6,921

 
6,090

Real estate construction
957

 
840

 
940

 
997

 
2,906

Commercial real estate lending
12,485

 
13,170

 
9,583

 
7,918

 
8,996

Total commercial
215,559

 
219,728

 
111,207

 
81,470

 
94,211

Residential mortgage
52,300

 
52,212

 
51,482

 
51,957

 
51,920

Home equity revolving lines of credit
8,797

 
8,822

 
9,917

 
8,060

 
8,420

Home equity loans junior liens
5,566

 
5,250

 
5,327

 
5,581

 
5,356

Home equity
14,363

 
14,072

 
15,244

 
13,641

 
13,776

Other consumer
380

 
383

 
325

 
386

 
454

Total consumer
67,043

 
66,667

 
67,051

 
65,984

 
66,150

Total nonaccrual loans
282,602

 
286,395

 
178,258

 
147,454

 
160,361

Commercial real estate owned
7,473

 
9,695

 
7,942

 
9,242

 
9,906

Residential real estate owned
4,391

 
4,689

 
4,768

 
3,788

 
2,996

Bank properties real estate owned
1,805

 
1,672

 
1,859

 
710

 
655

Other real estate owned (“OREO”)
13,669

 
16,056

 
14,569

 
13,740

 
13,557

Total nonperforming assets (“NPAs”)
$
296,271

 
$
302,451

 
$
192,827

 
$
161,194

 
$
173,918

Commercial real estate-investor & Real estate construction nonaccrual loans detail:
 
 
 
 
 
 
 
 
 
Multi-family
$
115

 
$
415

 
$
2

 
$
2

 
$
40

Non-owner occupied
11,413

 
11,915

 
8,641

 
6,919

 
6,050

Commercial real estate — investor
$
11,528

 
$
12,330

 
$
8,643

 
$
6,921

 
$
6,090

1-4 family construction
$
153

 
$
274

 
$
314

 
$
337

 
$
682

All other construction
804

 
566

 
626

 
660

 
2,224

Real estate construction
$
957

 
$
840

 
$
940

 
$
997

 
$
2,906

Accruing loans past due 90 days or more:
 
 
 
 
 
 
 
 
 
Commercial
$
248

 
$
217

 
$
249

 
$
178

 
$
262

Consumer
1,246

 
1,412

 
1,399

 
1,306

 
1,400

Total accruing loans past due 90 days or more
$
1,494

 
$
1,629

 
$
1,648

 
$
1,484

 
$
1,662

Restructured loans (accruing):
 
 
 
 
 
 
 
 
 
Commercial
$
57,251

 
$
57,980

 
$
59,595

 
$
55,006

 
$
60,219

Consumer
26,175

 
27,617

 
27,768

 
27,803

 
30,001

Total restructured loans (accruing)
$
83,426

 
$
85,597

 
$
87,363

 
$
82,809

 
$
90,220

Nonaccrual restructured loans (included in nonaccrual loans)
$
34,841

 
$
35,232

 
$
37,684

 
$
36,583

 
$
43,699

Ratios:
 
 
 
 
 
 
 
 
 
Nonaccrual loans to total loans
1.43
%
 
1.49
%
 
0.95
%
 
0.80
%
 
0.88
%
NPAs to total loans plus OREO
1.49
%
 
1.57
%
 
1.03
%
 
0.87
%
 
0.95
%
NPAs to total assets
1.02
%
 
1.07
%
 
0.70
%
 
0.59
%
 
0.64
%
Allowance for loan losses to nonaccrual loans
95
%
 
97
%
 
154
%
 
178
%
 
163
%





54



TABLE 9: Nonperforming Assets (continued)
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
 
June 30,
2015
 
($ in Thousands)
Accruing loans 30-89 days past due:
 
 
 
Commercial and industrial
$
2,124

 
$
2,901

 
$
1,011

 
$
3,296

 
$
6,357

Commercial real estate — owner occupied
193

 
520

 
7,142

 
2,018

 
1,090

Commercial and business lending
2,317

 
3,421

 
8,153

 
5,314

 
7,447

Commercial real estate — investor
2,715

 
1,072

 
291

 
1,218

 
19,843

Real estate construction
524

 
415

 
296

 
373

 
312

Commercial real estate lending
3,239

 
1,487

 
587

 
1,591

 
20,155

Total commercial
5,556

 
4,908

 
8,740

 
6,905

 
27,602

Residential mortgage
7,382

 
3,594

 
4,930

 
4,811

 
6,602

Home equity revolving lines of credit
6,075

 
3,582

 
5,559

 
6,142

 
5,157

Home equity loans junior liens
1,655

 
2,222

 
2,360

 
2,423

 
1,894

Home equity
7,730

 
5,804

 
7,919

 
8,565

 
7,051

Other consumer
1,895

 
1,682

 
1,870

 
1,723

 
1,655

Total consumer
17,007

 
11,080

 
14,719

 
15,099

 
15,308

Total accruing loans 30-89 days past due
$
22,563

 
$
15,988

 
$
23,459

 
$
22,004

 
$
42,910

Commercial real estate-investor & Real estate construction accruing loans 30-89 days past due detail:
 
 
 
 
 
 
 
 
 
Farmland
$

 
$

 
$

 
$
66

 
$

Multi-family
668

 
324

 
108

 
114

 
541

Non-owner occupied
2,047

 
748

 
183

 
1,038

 
19,302

Commercial real estate — investor
$
2,715

 
$
1,072

 
$
291

 
$
1,218

 
$
19,843

1-4 family construction
$
157

 
$

 
$
27

 
$
28

 
$
213

All other construction
367

 
415

 
269

 
345

 
99

Real estate construction
$
524

 
$
415

 
$
296

 
$
373

 
$
312

Potential problem loans:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
379,818

 
$
328,464

 
$
233,130

 
$
192,174

 
$
127,028

Commercial real estate — owner occupied
45,671

 
41,107

 
35,706

 
41,466

 
41,997

Commercial and business lending
425,489

 
369,571

 
268,836

 
233,640

 
169,025

Commercial real estate — investor
25,081

 
25,385

 
25,944

 
23,633

 
23,543

Real estate construction
2,117

 
2,422

 
3,919

 
2,354

 
1,327

Commercial real estate lending
27,198

 
27,807

 
29,863

 
25,987

 
24,870

Total commercial
452,687

 
397,378

 
298,699

 
259,627

 
193,895

Residential mortgage
3,953

 
3,488

 
2,796

 
3,966

 
5,341

Home equity revolving lines of credit
62

 
48

 
48

 
141

 
202

Home equity loans junior liens
32

 
161

 
174

 
86

 
230

Home equity
94

 
209

 
222

 
227

 
432

Total consumer
4,047

 
3,697

 
3,018

 
4,193

 
5,773

Total potential problem loans
$
456,734

 
$
401,075

 
$
301,717

 
$
263,820

 
$
199,668

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, 2016 was 1.43%, as compared to 0.88% at June 30, 2015 and 0.95% at December 31, 2015. 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, 2016 were relatively unchanged from both June 30, 2015 and December 31, 2015.

55



Troubled Debt Restructurings (“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. The increase in potential problem loans is primarily due to the risk migration on certain general commercial and oil and gas credits.
Other Real Estate Owned: Other real estate owned was $14 million at June 30, 2016 and June 30, 2015, compared to $15 million at December 31, 2015. Management actively seeks to ensure properties held are monitored to minimize the Corporation’s risk of loss.
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.”
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.
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 2015 Annual Report on Form 10-K for additional information on the allowance for loan losses. See section, “Nonaccrual Loans, Potential Problem Loans, and Other Real Estate Owned,” 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 9 provides additional information regarding nonperforming assets, and Tables 10 and 11 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, 2016 and December 31, 2015 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 Corporation’s allowance for loan losses methodology considers an estimate of the historical loss emergence period (which is the period of time between the event that triggers a loss and the confirmation and / or charge off of that loss), probability of default, and loss given default for each loan portfolio segment. Management allocates the allowance for loan losses by pools of risk within each loan portfolio. 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. Loans that have been criticized 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. During the

56



second quarter of 2016, in conjunction with the annual stress testing processes and continual review of the allowance for loan losses methodology, the Corporation further segmented its commercial and industrial loan portfolio into more refined risk categories. Specifically, the Corporation isolated certain mortgage warehouse lines structured as repurchase facilities as we own the underlying mortgage loan; thus, the inherent risk is lower in these transactions. As a result, the loss factors for these mortgage warehouse lines were updated to align more closely with those of similar portfolio mortgage loans, resulting in a $6 million reduction to the allowance for credit losses. 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.
TABLE 10: Allowance for Credit Losses
 
YTD June 30,
2016
YTD June 30,
2015
June 30,
2016
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
 
($ in Thousands)
Allowance for Loan Losses:
 
 
 
 
 
 
 
Balance at beginning of period
$
274,264

$
266,302

$
277,370

$
274,264

$
262,536

$
261,538

$
265,268

Provision for loan losses
31,000

9,500

11,000

20,000

19,500

9,000

5,000

Charge offs
(45,866
)
(27,807
)
(24,621
)
(21,245
)
(12,741
)
(11,732
)
(14,537
)
Recoveries
8,382

13,543

4,031

4,351

4,969

3,730

5,807

Net charge offs
(37,484
)
(14,264
)
(20,590
)
(16,894
)
(7,772
)
(8,002
)
(8,730
)
Balance at end of period
$
267,780

$
261,538

$
267,780

$
277,370

$
274,264

$
262,536

$
261,538

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

$
24,900

$
24,400

$
24,400

$
23,900

$
24,900

$
24,900

Provision for unfunded commitments
3,000


3,000


500

(1,000
)

Balance at end of period
$
27,400

$
24,900

$
27,400

$
24,400

$
24,400

$
23,900

$
24,900

Allowance for credit losses(A)
$
295,180

$
286,438

$
295,180

$
301,770

$
298,664

$
286,436

$
286,438

Provision for credit losses(B)
$
34,000

$
9,500

$
14,000

$
20,000

$
20,000

$
8,000

$
5,000

Net loan (charge offs) recoveries:
 
 
 
 
 
 
 
Commercial and industrial
$
(33,500
)
$
(8,571
)
$
(18,564
)
$
(14,936
)
$
(4,586
)
$
(4,709
)
$
(3,921
)
Commercial real estate — owner occupied
(63
)
(1,937
)
(20
)
(43
)
(291
)
504

(1,198
)
Commercial and business lending
(33,563
)
(10,508
)
(18,584
)
(14,979
)
(4,877
)
(4,205
)
(5,119
)
Commercial real estate — investor
679

673

(560
)
1,239

(665
)
(496
)
(1,856
)
Real estate construction
(247
)
1,416

(219
)
(28
)
140

(38
)
673

Commercial real estate lending
432

2,089

(779
)
1,211

(525
)
(534
)
(1,183
)
Total commercial
(33,131
)
(8,419
)
(19,363
)
(13,768
)
(5,402
)
(4,739
)
(6,302
)
Residential mortgage
(1,989
)
(2,283
)
(757
)
(1,232
)
(714
)
(1,562
)
(1,278
)
Home equity revolving lines of credit
(627
)
(1,466
)
275

(902
)
(294
)
(533
)
(246
)
Home equity loans junior liens
(202
)
(541
)
42

(244
)
(623
)
(358
)
(118
)
Home equity
(829
)
(2,007
)
317

(1,146
)
(917
)
(891
)
(364
)
Other consumer
(1,535
)
(1,555
)
(787
)
(748
)
(739
)
(810
)
(786
)
Total consumer
(4,353
)
(5,845
)
(1,227
)
(3,126
)
(2,370
)
(3,263
)
(2,428
)
Total net charge offs
$
(37,484
)
$
(14,264
)
$
(20,590
)
$
(16,894
)
$
(7,772
)
$
(8,002
)
$
(8,730
)
Commercial real estate-investor and Real estate construction net charge off detail:
 
 
 
 
 
 
 
Multi-family
$
(2
)
$
(4
)
$

$
(2
)
$

$
(35
)
$

Non-owner occupied
681

677

(560
)
1,241

(665
)
(461
)
(1,856
)
Commercial real estate — investor
$
679

$
673

$
(560
)
$
1,239

$
(665
)
$
(496
)
$
(1,856
)
1-4 family construction
$
(33
)
$
484

$
16

$
(49
)
$
235

$
31

$
280

All other construction
(214
)
932

(235
)
21

(95
)
(69
)
393

Real estate construction
$
(247
)
$
1,416

$
(219
)
$
(28
)
$
140

$
(38
)
$
673

Ratios:
 
 
 
 
 
 
 
Allowance for loan losses to total loans
1.35 %

1.43
%
1.35
%
1.44
%
1.47
%
1.42
%
1.43
%
Allowance for loan losses to net charge offs (Annualized)
3.6x

9.1x

3.2x

4.1x

8.9x

8.3x

7.5x

(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.

57



TABLE 11: Annualized net (charge offs) recoveries (A)
(in basis points)
YTD June 30,
2016
YTD June 30,
2015
June 30,
2016
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
 
 
Net loan (charge offs) recoveries:
 
 
 
 
 
 
 
Commercial and industrial
(106
)
(29
)
(114
)
(97
)
(31
)
(31
)
(25
)
Commercial real estate — owner occupied
(1
)
(39
)
(1
)
(2
)
(12
)
21

(48
)
Commercial and business lending
(92
)
(30
)
(100
)
(85
)
(28
)
(24
)
(29
)
Commercial real estate — investor
4

4

(7
)
15

(8
)
(6
)
(24
)
Real estate construction
(4
)
28

(7
)
(1
)
5

(1
)
26

Commercial real estate lending
2

10

(7
)
11

(5
)
(5
)
(11
)
Total commercial
(56
)
(15
)
(64
)
(48
)
(19
)
(17
)
(22
)
Residential mortgage
(7
)
(9
)
(5
)
(8
)
(5
)
(11
)
(9
)
Home equity revolving lines of credit
(14
)
(34
)
13

(41
)
(13
)
(24
)
(11
)
Home equity loans junior liens
(35
)
(71
)
15

(83
)
(195
)
(104
)
(32
)
Home equity
(17
)
(39
)
13

(46
)
(36
)
(35
)
(14
)
Other consumer
(75
)
(71
)
(78
)
(72
)
(69
)
(75
)
(73
)
Total consumer
(12
)
(17
)
(7
)
(17
)
(13
)
(18
)
(14
)
Total net charge offs
(39
)
(16
)
(42
)
(36
)
(17
)
(17
)
(19
)
Commercial real estate-investor and Real estate construction net charge off detail:
 
 
 
 
 
 
 
Multi-family
 N\M

 N\M

 N\M

 N\M

 N\M

(2
)
 N\M

Non-owner occupied
6

6

(9
)
21

(11
)
(8
)
(34
)
Commercial real estate — investor
4

4

(7
)
15

(8
)
(6
)
(24
)
1-4 family construction
(2
)
31

2

(6
)
29

4

35

All other construction
(5
)
27

(11
)
1

(5
)
(3
)
22

Real estate construction
(4
)
28

(7
)
(1
)
5

(1
)
26

(A)
Annualized ratio of net charge offs to average loans by loan type.
N/M = Not Meaningful
At June 30, 2016, the allowance for credit losses was $295 million, compared to $286 million at June 30, 2015 and $299 million at December 31, 2015. At June 30, 2016, the allowance for loan losses to total loans was 1.35% and covered 95% of nonaccrual loans, compared to 1.43% and 163%, respectively, at June 30, 2015 and 1.47% and 154%, respectively, at December 31, 2015. Management believes the level of allowance for loan losses to be appropriate at June 30, 2016 and 2015 and December 31, 2015.
Key contributors to the decrease in the allowance for credit losses and the related provision for credit losses during the first half of 2016 were:

YTD June net charge offs of $37 million increased $23 million from the comparable period in 2015, primarily due to the charge off of three large oil and gas related credits. See Tables 10 and 11 for additional information regarding the activity in the allowance for loan losses.

Total loans increased $1.1 billion (6%) during the first the half of 2016, including a $515 million (7%) increase in commercial and business lending, a $385 million (9%) increase in commercial real estate lending, and a $201 million (3%) increase in total consumer. Compared to June 30, 2015, total loans increased $1.5 billion (8%), including a $563 million (13%) increase in commercial real estate lending, a $559 million (8%) increase in total consumer and a $390 million (5%) 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 increased $104 million from the fourth quarter of 2015 primarily due to the risk migration of oil and gas related credits. Nonaccrual loans increased $122 million from June 30, 2015, also principally related to the risk migration within the oil and gas loan portfolio. See also Note 7, “Loans,” of the notes to consolidated financial statements and section “Nonaccrual Loans, Potential Problem Loans, and Other Real Estate Owned” for additional disclosures on the changes in asset quality.


58



Potential problem loans increased $155 million from December 31, 2015 and increased $257 million from June 30, 2015, primarily due to the risk migration on general commercial and oil and gas related credits. See Table 9 for additional information on the changes in potential problem loans.

The allowance for loan losses attributable to oil and gas related credits (included within the commercial and industrial allowance for loan losses) was flat at $42 million for June 30, 2016 and December 31, 2015 compared to $26 million at June 30, 2015. See also Oil and gas lending with the "Credit Risk" section for additional information.
The allowance for unfunded commitments of $27 million increased $3 million during the first half of 2016, driven by risk rating migration and new volumes.
Deposits and Customer Funding
TABLE 12: Period End Deposit and Customer Funding Composition
($ in Thousands)
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
June 30, 2015
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Noninterest-bearing demand
$
5,039,336

 
25
%
 
$
5,272,685

 
26
%
 
$
5,562,466

 
27
%
 
$
4,657,261

 
23
%
 
$
4,332,171

 
23
%
Savings
1,451,801

 
7

 
1,426,951

 
7

 
1,334,420

 
6

 
1,346,407

 
6

 
1,359,478

 
7

Interest-bearing demand
3,789,138

 
19

 
3,698,941

 
18

 
3,445,000

 
17

 
3,416,429

 
17

 
3,576,311

 
19

Money market
8,448,543

 
42

 
8,718,841

 
42

 
9,102,977

 
43

 
9,516,503

 
46

 
8,374,186

 
43

Brokered CDs
46,268

 

 
41,440

 

 
42,443

 

 
42,689

 

 
39,760

 

Other time
1,517,764

 
7

 
1,526,602

 
7

 
1,520,359

 
7

 
1,579,106

 
8

 
1,587,657

 
8

Total deposits
$
20,292,850

 
100
%
 
$
20,685,460

 
100
%
 
$
21,007,665

 
100
%
 
$
20,558,395

 
100
%
 
$
19,269,563

 
100
%
Customer funding
464,880

 
 
 
508,262

 
 
 
383,568

 
 
 
524,630

 
 
 
433,044

 
 
Total deposits and customer funding
$
20,757,730

 
 
 
$
21,193,722

 
 
 
$
21,391,233

 
 
 
$
21,083,025

 
 
 
$
19,702,607

 
 
Network transaction deposits (1)
$
3,141,214

 
 
 
$
3,399,054

 
 
 
$
3,174,911

 
 
 
$
3,207,867

 
 
 
$
2,920,939

 
 
Total deposits and customer funding, excluding Brokered CDs and network transaction deposits
$
17,570,248

 
 
 
$
17,753,228

 
 
 
$
18,173,879

 
 
 
$
17,832,469

 
 
 
$
16,741,908

 
 
Time deposits of $100,000 or more
$
486,228

 
 
 
$
480,469

 
 
 
$
465,950

 
 
 
$
511,070

 
 
 
$
470,092

 
 
Time deposits of more than $250,000
$
151,133

 
 
 
$
144,294

 
 
 
$
127,120

 
 
 
$
169,146

 
 
 
$
185,273

 
 
(1) Included above in interest-bearing demand and money market.
Deposits are the Corporation’s largest source of funds.
Total deposits decreased $715 million (3%) from December 31, 2015, primarily due to decreases in noninterest-bearing demand deposits and money market deposits. Total deposits increased $1.0 billion (5%) from June 30, 2015, primarily due to an increase in noninterest-bearing demand deposits.
Non-maturity deposits, which excludes brokered CDs and other time deposits, accounted for 93% of our total deposits at June 30, 2016.
Included in the above amounts were $3.1 billion of network deposits, primarily sourced from other financial institutions and intermediaries. These represented 15% of our total deposits at June 30, 2016.
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.


59



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, 2016, 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 also 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, 2016, 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, 2016, the Bank had $1.9 billion available for discount window borrowings.
The Parent Company has a $200 million commercial paper program, of which, $76 million was outstanding as of June 30, 2016.
Dividends and service fees from subsidiaries, as well as the proceeds from issuance of capital are also 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 the Bank at June 30, 2016 are displayed below.
TABLE 13: Credit Ratings
 
Moody’s
 
S&P*
Bank short-term deposits
P1
  
-
Bank long-term
A1
  
BBB+
Corporation short-term
P2
  
-
Corporation long-term
Baa1
  
BBB
Outlook
Negative
  
Stable
* - Standard and Poor's
 
 
 
For the six months ended June 30, 2016, net cash provided by operating and financing activities was $105 million and $1.1 billion, respectively, while investing activities used net cash of $1.2 billion, for a net increase in cash and cash equivalents of $4 million since year-end 2015. During the first half of 2016, assets increased to $29.0 billion (up $1.3 billion or 5%) compared to year-end 2015, primarily due to a $1.1 billion increase in loans. On the funding side, deposits decreased $715 million while short-term and long-term funding increased $1.1 billion and $835 million, respectively.
For the six months ended June 30, 2015, net cash provided by operating and financing activities was $99 million and $228 million, respectively, while investing activities used net cash of $843 million, for a net decrease in cash and cash equivalents of $517 million since year-end 2014. During the first half of 2015, loans and investment securities increased $709 million and $139 million,

60



respectively. On the funding side, deposits increased $506 million, short-term funding increased $527 million while long-term funding decreased $750 million.
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 our risk appetite for interest rate risk over both short-term and long-term horizons. No limit breaches occurred during the first half of 2016.
The major sources of our 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. These measures show that our interest rate risk profile was slightly asset sensitive at June 30, 2016.
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 2015 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 ("Dynamic Forecast"), and 2) a static forecast where the current balance sheet is held constant ("Static Forecast").
TABLE 14: Estimated % Change in Net Interest Income Over 12 Months
 
Estimated % Change in Rate Sensitive Earnings at Risk Over 12 Months
 
Dynamic Forecast
June 30, 2016
 
Static Forecast
June 30, 2016
 
Dynamic Forecast
December 31, 2015
 
Static Forecast
December 31, 2015
Instantaneous Rate Change
 
 
 
 
 
 
 
100 bp increase in interest rates
1.4
%
 
0.8
%
 
1.6
%
 
2.1
%
200 bp increase in interest rates
2.5
%
 
1.4
%
 
3.0
%
 
4.4
%
At June 30, 2016, the MVE profile indicates a decline in net balance sheet value due to instantaneous upward changes in rates.

TABLE 15: Market Value of Equity Sensitivity
 
June 30, 2016
 
December 31, 2015
Instantaneous Rate Change
 
 
 
100 bp increase in interest rates
(2.8
)%
 
(1.7
)%
200 bp increase in interest rates
(6.2
)%
 
(3.7
)%

61



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 changes in 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 16: Contractual Obligations and Other Commitments
June 30, 2016
One Year
or Less
 
One to
Three Years
 
Three to
Five Years
 
Over
Five Years
 
Total
 
($ in Thousands)
Time deposits
$
848,242

 
$
450,540

 
$
256,693

 
$
8,557

 
$
1,564,032

Short-term funding
1,911,557

 

 

 

 
1,911,557

Long-term funding
500,016

 
2,115,000

 
648,919

 
247,540

 
3,511,475

Operating leases
10,417

 
18,635

 
15,931

 
17,968

 
62,951

Commitments to extend credit
3,872,344

 
2,476,502

 
1,388,635

 
192,937

 
7,930,418

Total
$
7,142,576

 
$
5,060,677

 
$
2,310,178

 
$
467,002

 
$
14,980,433

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, 2016, 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, and Legal Proceedings,” 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 and long-term funding.
Table 16 summarizes significant contractual obligations and other commitments at June 30, 2016, at those amounts contractually due to the recipient, including any premiums or discounts, hedge basis adjustments, or other similar carrying value adjustments.
Capital
TABLE 17: Capital Ratios
 
Quarter Ended
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
 
June 30,
2015
 
(In Thousands, except per share data)
Risk-based Capital (2)
 
 
 
 
 
 
 
 
 
Common equity Tier 1
$
1,940,704

 
$
1,902,593

 
$
1,897,944

 
$
1,865,289

 
$
1,825,478

Tier 1 capital
2,059,661

 
2,021,125

 
2,016,861

 
1,983,612

 
1,941,694

Total capital
2,573,941

 
2,526,653

 
2,515,861

 
2,481,661

 
2,436,594

Total risk-weighted assets
21,168,161

 
20,453,744

 
19,929,963

 
19,866,379

 
19,610,281

Common equity Tier 1 capital ratio
9.17
%
 
9.30
%
 
9.52
%
 
9.39
%
 
9.31
%
Tier 1 capital ratio
9.73
%
 
9.88
%
 
10.12
%
 
9.98
%
 
9.90
%
Total capital ratio
12.16
%
 
12.35
%
 
12.62
%
 
12.49
%
 
12.43
%
Tier 1 leverage ratio
7.43
%
 
7.55
%
 
7.60
%
 
7.53
%
 
7.53
%
Selected Equity and Performance Ratios (1) (2)
 
 
 
 
 
 
 
 
 
Total stockholders’ equity / assets
10.43
%
 
10.58
%
 
10.60
%
 
10.76
%
 
10.69
%
Return on average assets
0.69
%
 
0.62
%
 
0.62
%
 
0.72
%
 
0.74
%
(1)
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's considered to be a critical metric with which to analyze and evaluate financial condition and capital strength. See Note 8 for additional information on goodwill, core deposit intangibles, and other intangibles.
(2)
The Federal Reserve establishes regulatory capital adequacy requirements, including well-capitalized standards for the Corporation. The regulatory capital requirements effective for the Corporation follow Basel III, subject to certain transition provisions. These regulatory capital measurements are used by

62



management, regulators, investors, and analysts to assess, monitor and compare the quality and composition of our capital with the capital of other financial services companies.

TABLE 18: Non-GAAP Measures
 
YTD
Quarter Ended
 
June
 2016
June
2015
June 30,
2016
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
 
 
 
(In Thousands, except per share data)
Selected Equity and Performance Ratios (1) (2)
 
 
 
 
 
 
 
Tangible common equity / tangible assets
6.85
 %
6.86
 %
6.85
 %
6.89
 %
6.85
 %
6.97
 %
6.86
 %
Return on average equity
6.18
 %
6.77
 %
6.19
 %
5.76
 %
5.77
 %
6.72
 %
6.89
 %
Return on average tangible common equity
9.38
 %
10.39
 %
10.04
 %
8.72
 %
8.78
 %
10.35
 %
10.62
 %
Return on average Common equity Tier 1
9.21
 %
10.38
 %
9.86
 %
8.55
 %
8.60
 %
10.20
 %
10.55
 %
Tangible Common Equity (1)
 
 
 
 
 
 
 
Common equity
 
 
$
2,909,946

$
2,862,151

$
2,815,867

$
2,832,418

$
2,782,376

Goodwill and other intangible assets, net
 
 
(988,378
)
(988,917
)
(985,302
)
(985,822
)
(986,707
)
Tangible common equity
 
 
$
1,921,568

$
1,873,234

$
1,830,565

$
1,846,596

$
1,795,669

Tangible Assets Reconciliation (1)
 
 
 
 
 
 
 
Total assets
 
 
$
29,038,699

$
28,178,867

$
27,711,835

$
27,463,766

$
27,181,377

Goodwill and other intangible assets, net
 
 
(988,378
)
(988,917
)
(985,302
)
(985,822
)
(986,707
)
Tangible assets
 
 
$
28,050,321

$
27,189,950

$
26,726,533

$
26,477,944

$
26,194,670

Average Tangible Common Equity and Common Equity Tier 1 Reconciliation (1) (2)
 
 
 
 
 
 
 
Common equity
$
2,859,077

$
2,789,698

$
2,868,772

$
2,849,382

$
2,819,267

$
2,797,630

$
2,794,341

Goodwill and other intangible assets, net
(988,913
)
(978,867
)
(988,699
)
(989,127
)
(985,605
)
(986,360
)
(987,071
)
Tangible common equity
1,870,164

1,810,831

1,880,073

1,860,255

1,833,662

1,811,270

1,807,270

Less: Accumulated other comprehensive income / loss
2,343

(17,081
)
1,365

3,320

4,266

(6,601
)
(16,305
)
Less: Deferred tax assets/deferred tax liabilities, net
32,354

18,311

31,803

32,906

34,199

32,767

28,854

Average common equity Tier 1
$
1,904,861

$
1,812,061

$
1,913,241

$
1,896,481

$
1,872,127

$
1,837,436

$
1,819,819

 
 
 
 
 
 
 
 
Efficiency Ratio Reconciliation (3)
 
 
 
 
 
 
 
Federal Reserve efficiency ratio
69.18
 %
70.24
 %
69.34
 %
69.01
 %
70.49
 %
68.85
 %
70.23
 %
Fully tax-equivalent adjustment
(1.36
)%
(1.37
)%
(1.36
)%
(1.37
)%
(1.52
)%
(1.38
)%
(1.35
)%
Other intangible amortization
(0.21
)%
(0.34
)%
(0.21
)%
(0.20
)%
(0.21
)%
(0.36
)%
(0.35
)%
Fully tax-equivalent efficiency ratio
67.61
 %
68.53
 %
67.77
 %
67.44
 %
68.76
 %
67.11
 %
68.53
 %

(1)
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.
(2)
The Federal Reserve establishes regulatory capital requirements, including well-capitalized standards for the Corporation. The regulatory capital requirements effective for the Corporation follow 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 our capital with the capital of other financial services companies.
(3)
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.

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, 2016, the capital ratios of the Corporation and its banking subsidiary were in excess of regulatory minimum requirements. The Corporation’s capital ratios are summarized in Table 17.

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During the first half of 2016, the Corporation repurchased over 1 million shares of common stock for $20 million or an average cost of $17.10 per share. The Corporation also repurchased approximately $1 million of depositary shares, each representing a 1/40th interest of a share of the 8.00% Non-Cumulative Perpetual Preferred Stock, Series B, during the first half of 2016. 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 2016. 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.
Sequential Quarter Results
The Corporation reported net income of $49 million for the second quarter of 2016, compared to net income of $43 million for the first quarter of 2016. Net income available to common equity was $47 million for the second quarter of 2016 or net income of $0.31 for both basic and diluted earnings per common share. Comparatively, net income available to common equity for the first quarter of 2016, was $40 million, or net income of $0.27 for both basic and diluted earnings per common share (see Table 1).
Fully tax-equivalent net interest income for the second quarter of 2016 was $182 million, $5 million higher than the first quarter of 2016. The Federal funds target rate remained constant at 0.50%. The net interest margin was level at 2.81% for both the first and second quarters of 2016. Average earning assets increased $696 million to $26.0 billion in the second quarter of 2016, with average loans up $719 million, while average investments and other short-term investments were down $23 million (primarily in municipal and mortgage-related securities). On the funding side, average short and long-term funding was up $1.0 billion (primarily FHLB advances), while average interest-bearing deposits were down $260 million (primarily due to a decrease in money market deposits which was partially offset by an increase in interest-bearing demand deposits) (see Table 2).
The provision for credit losses was $14 million for the second quarter of 2016, down $6 million from the first quarter of 2016 (see Table 10). See discussion under sections, “Provision for Credit Losses,” “Nonaccrual Loans, Potential Problem Loans, and Other Real Estate Owned,” and “Allowance for Credit Losses.”
Noninterest income for the second quarter of 2016 decreased $1 million (1%) to $82 million versus the first quarter of 2016. Fee-based revenue increased $2 million (3%) from the first quarter of 2016, primarily due to increases across all categories. Bank owned life insurance decreased $2 million primarily due to proceeds from BOLI policy redemptions received during the first quarter of 2016. Net mortgage banking income was flat at $4 million for both the first and second quarters of 2016 (see Table 3).
Noninterest expense remained relatively unchanged at $174 million. Personnel expense was $102 million for the second quarter of 2016, up $1 million (1%) from the first quarter of 2016. Business development and advertising expense decreased $2 million, primarily due to the timing of marketing campaigns. FDIC expense was $9 million, up $1 million from the first quarter of 2016, reflecting growth in criticized and risk-weighted assets. All remaining noninterest expense categories on a combined basis remained relatively flat compared to first quarter of 2016 (see Table 4).
For the second quarter of 2016, the Corporation recognized income tax expense of $21 million, compared to income tax expense of $19 million for first quarter of 2016. The effective tax rate was 30.39% and 30.51% for the second quarter of 2016 and the first quarter of 2016, respectively.
Comparable Second Quarter Results
The Corporation reported net income of $49 million for both the second quarter of 2016 and the second quarter of 2015. Net income available to common equity was $47 million for the second quarter of 2016, or net income of $0.31 for both basic and diluted earnings per common share. Comparatively, net income available to common equity for the second quarter of 2015, was $48 million, or net income of $0.32 for basic earnings per common share and $0.31 for diluted earnings per common share (see Table 1).
Fully tax-equivalent net interest income for the second quarter of 2016 was $182 million, $10 million higher than the second quarter of 2015. The Federal funds target rate was 0.50% in second quarter of 2016 compared to 0.25% for second quarter of 2015. The net interest margin between the comparable quarters was down 2 bp, to 2.81% in the second quarter of 2016. Average earning assets increased $1.7 billion to $26.0 billion in the second quarter of 2016, with average loans up $1.5 billion (predominantly due to increases in commercial and residential mortgage loans). On the funding side, average interest-bearing deposits were relatively flat from the second quarter of 2015, while noninterest-bearing demand deposits were up $679 million. Average short and long-term funding increased $961 million (primarily FHLB advances, which was partially offset by the early redemption of $430 million of senior notes) (see Table 2).

64



The provision for credit losses was $14 million for the second quarter of 2016, up $9 million from the second quarter of 2015 (see Table 10). See discussion under sections, “Provision for Credit Losses,” “Nonaccrual Loans, Potential Problem Loans, and Other Real Estate Owned,” and “Allowance for Credit Losses.”
Noninterest income for the second quarter of 2016 decreased $4 million (5%) to $82 million versus the second quarter of 2015. Net mortgage banking income decreased $6 million, predominantly due to an unfavorable change in the fair value of the mortgage derivatives and an increase in the mortgage servicing rights valuation reserve. Fee-based revenue increased $1 million primarily in insurance commissions. During the second quarter of 2016, the Corporation sold approximately $240 million of FNMA and FHLMC mortgage-related securities and reinvested into GNMA mortgage-related securities, generating a $3 million net gain on sale compared to a net gain of $1 million during the second quarter of 2015 (the Corporation sold approximately $1.1 billion of FNMA and FHLMC mortgage-related securities and reinvested into GNMA mortgage-related securities) (See Note 6, "Investment Securities" of the notes to consolidated financial statements for additional information on the investment securities portfolio.)
On a comparable quarter basis, noninterest expense decreased $2 million (1%) to $174 million for the second quarter of 2016. Technology expense was down $2 million (12%) from the second quarter of 2015, primarily driven by a reduction in external technology support services. FDIC expense was $9 million, up $3 million from the second quarter of 2015, reflecting growth in criticized and risk-weighted assets. All remaining noninterest expense categories on a combined were down $3 million (5%) compared to second quarter of 2015 (see Table 4).
The Corporation recognized income tax expense of $21 million for the second quarter of 2016, compared to income tax expense of $22 million for second quarter of 2015. The effective tax rate was 30.39% and 30.61% for the second quarter of 2016 and 2015, respectively.
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, non-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 $55 million for the first six months of 2016, down $3 million compared to $58 million for the first six months of 2015. Segment revenue increased $5 million to $182 million for the first six months of 2016 compared to $177 million for the first six months of 2015, primarily due to higher net interest income from the growth in average loan balances and the interest rate increase at the end of 2015. The credit provision increased $8 million to $28 million during the first six months of 2016 due to loan growth and a decrease in loan credit quality in the oil and gas portfolio. Average loan balances were $9.9 billion for the first six months of 2016, up $602 million from the first six months of 2015. Average deposit balances were $5.7 billion for the first six months of 2016, up $173 million from the first six months of 2015. Average allocated capital increased $94 million to $1.0 billion for the first six months of 2016 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 $28 million for the first six months of 2016, down $5 million compared to $33 million in the first six months of 2015. Segment revenue decreased $9 million to $299 million for the first six months of 2016, primarily due to a $6 million unfavorable change in the fair value of mortgage derivatives and a $3 million addition to the mortgage servicing rights valuation reserve. The credit provision for loans decreased $1 million to $12 million for the first six months of 2016 due to improving credit quality, partially offset by loan growth. Average loan balances were $9.2 billion for the first six months of 2016, up $603 million from the first six months of 2015. Average deposits were $11.2 billion for the first six months of 2016, up $522

65



million from the first six months of 2015. Average allocated capital decreased $13 million to $631 million for the first six months of 2016.
The Risk Management and Shared Services segment had net income of $8 million for the first six months of 2016, up $3 million compared to $5 million for the first six months of 2015. Net interest income increased $10 million primarily due to an increase in the volume of funding provided to the Corporate and Commercial Specialty segment (as loan growth exceeded deposit growth within this segment), as well as a higher interest rate charged on this funding due to the interest rate increase at the end of 2015. Noninterest income increased $7 million primarily due to net gains on the sale of investment securities of $6 million. The credit provision increased $17 million due to loan growth and a decrease in loan credit quality. Average earning asset balances were $6.5 billion for the first six months of 2016, up $205 million from an average balance of $6.3 billion for the first six months of 2015, primarily in investment securities. Average deposits were $3.5 billion for the first six months of 2016, up $394 million from the first six months of 2015. Average allocated capital increased to $225 million for the first six months of 2016.

Comparable Quarter Segment Review
The Corporate and Commercial Specialty segment had net income of $26 million for the second quarter of 2016, down $3 million from the comparable quarter in 2015. Segment revenue increased $3 million compared to second quarter of 2015, primarily due to higher net interest income from the growth in average loan balances. Average loan balances were $10.1 billion for the second quarter of 2016, up $705 million from an average balance of $9.4 billion for second quarter of 2015. The credit provision increased $5 million to $15 million for the second quarter of 2016, due to loan growth and a decrease in loan credit quality in the oil and gas portfolio. Average deposit balances were $5.6 billion for the second quarter of 2016, down $149 million from the comparable quarter of 2015. Average allocated capital increased $99 million to $1.1 billion for second quarter of 2016, reflecting the increase in the segment's loan balances.
The Community, Consumer, and Business Banking segment had net income of $14 million for the second quarter of 2016, down $2 million compared to $16 million for second quarter of 2015. Segment revenue declined $7 million to $150 million for the second quarter of 2016, primarily due to a $3 million unfavorable change in the fair value of mortgage derivatives and a $2 million addition to the mortgage servicing rights valuation reserve. Total noninterest expense for second quarter of 2016 was $122 million, down $3 million from the comparable quarter of 2015. Average loan balances were $9.3 billion for the second quarter of 2016, up $614 million from the comparable quarter of 2015. Average deposits were $11.3 billion for the second quarter of 2016, up $469 million from average deposits of $10.9 billion for the comparable quarter of 2015.
The Risk Management and Shared Services segment had net income of $9 million for the second quarter of 2016, up $5 million from the comparable quarter in 2015. Net interest income increased $9 million primarily due to an increase in the volume of funding provided to the Corporate and Commercial Specialty segment (as loan growth exceeded deposit growth within this segment), as well as a higher interest rate charged on this funding due to the interest rate increase at the end of 2015.The credit provision increased $4 million due to loan growth and a decrease in loan credit quality. Average earning asset balances were $6.5 billion for second quarter of 2016, up $380 million from the comparable quarter of 2015, and average deposits were $3.4 billion for second quarter of 2016, up $343 million versus the comparable quarter of 2015.
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 2015 Annual Report on Form 10-K. There have been no changes in the Corporation's application of critical accounting policies since December 31, 2015. The mortgage servicing rights valuation has been included due to the continued impact of the low interest rate environment.
Mortgage Servicing Rights Valuation: The fair value of the Corporation's mortgage servicing rights asset is important to the presentation of the consolidated financial statements since the mortgage servicing rights are carried on the consolidated balance sheet at the lower of amortized cost or estimated fair value. Mortgage servicing rights do not trade in an active open market with readily observable prices. As such, like other participants in the mortgage banking business, the Corporation relies on 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 use of a discounted cash flow model involves judgment, particularly of estimated prepayment speeds of underlying mortgages serviced and the overall level of interest rates. Loan type and note interest rate are the predominant risk characteristics of the underlying loans used to stratify capitalized mortgage servicing rights for purposes of measuring impairment. The Corporation periodically reviews the assumptions underlying the valuation of mortgage servicing rights. While the Corporation believes that

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the values produced by the discounted cash flow model are indicative of the fair value of its mortgage servicing rights portfolio, these values can change significantly depending upon key factors, such as the then current interest rate environment, estimated prepayment speeds of the underlying mortgages serviced, and other economic conditions. The proceeds that might be received should the Corporation actually consider a sale of some or all of the mortgage servicing rights portfolio could differ from the valuation amounts reported at any point in time.
To better understand the sensitivity of the impact of prepayment speeds and refinance rates on the value of the mortgage servicing rights asset at June 30, 2016, (holding all other factors unchanged), if refinance rates were to decrease 50 bp, the estimated value of the mortgage servicing rights asset would have been approximately $11 million (or 18%) lower. Conversely, if refinance rates were to increase 50 bp, the estimated value of the mortgage servicing rights asset would have been approximately $9 million (or 16%) higher. However, the Corporation's potential recovery recognition due to valuation improvement is limited to the balance of the mortgage servicing rights valuation reserve, which was approximately $3 million at June 30, 2016. The potential recovery recognition is constrained as the Corporation has elected to use the amortization method of accounting (rather than fair value measurement accounting). Under the amortization method, mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. Therefore, the mortgage servicing right asset may only be marked up to the extent of the previously recognized valuation reserve. The Corporation believes the mortgage servicing rights asset is properly recorded in the consolidated financial statements. See Note 8, "Goodwill and Other Intangible Assets," of the notes to consolidated financial statements and section "Noninterest Income."
Future Accounting Pronouncements
New accounting policies adopted by the Corporation are discussed in Note 3, “New Accounting Pronouncements Adopted,” 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 discussed below. To the extent the adoption of new accounting standards materially affects the Corporation’s financial condition, results of operations, or liquidity, the impacts are discussed in the applicable sections of this financial review and the notes to consolidated financial statements.
In June 2016, 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 and 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. The Corporation intends to adopt the accounting standard, as required, and is currently evaluating the impact on its results of operations, financial position, and liquidity.
In March 2016, the FASB issued an amendment involving several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Entities should apply the amendment related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Entities should apply the amendment related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement retrospectively. The amendment requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. Early adoption is permitted. The Corporation intends to adopt the accounting standard during the first quarter of 2017, as required, and is currently evaluating the impact on its results of operations, financial position, and liquidity.
In March 2016, the FASB issued an amendment to eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize

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through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. This amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Entities should apply the amendment prospectively to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The Corporation intends to adopt the accounting standard during the first quarter of 2017, as required, and is currently evaluating the impact on its results of operations, financial position, and liquidity.
In February 2016, 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. The Corporation intends to adopt the accounting standard during the first quarter of 2019, as required, and is currently evaluating the impact on its results of operations, financial position, and liquidity.
In January 2016, 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 should 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. The Corporation intends to adopt the accounting standard during the first quarter of 2018, as required, and is currently evaluating the impact on its results of operations, financial position, and liquidity.
In May 2014, 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. In March 2016, the FASB issued amendments that intend to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. In May 2016, the FASB issued an amendment addressing clarifications to the guidance on collectability, presentation of sales taxes and other similar taxes collected, noncash consideration, and completed contracts at transition, while retaining the related principles contained in the new revenue recognition standard. In April 2016, the FASB issued an amendment clarifying guidance related to identifying performance obligations and licensing implementation guidance, while retaining the related principles contained in the new revenue recognition standard. The amendment was originally 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. Early application is

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not permitted. The Corporation intends to adopt the accounting standard during the first quarter of 2018, as required, and is currently evaluating the impact on its results of operations, financial position, and liquidity.
Recent Developments
On July 8, 2016, the Corporation sold $118 million of 10 and 15 year residential mortgages, originated between 2011 and 2016, to FNMA, for a net gain of approximately $4 million.
On July 26, 2016, the Board of Directors declared a regular quarterly cash dividend of $0.11 per common share, payable on September 15, 2016, to shareholders of record at the close of business on September 1, 2016. The Board of Directors also declared a regular quarterly cash dividend of $0.50 per depositary share on Associated Banc-Corp’s 8.00% Series B Non-Cumulative Perpetual Preferred Stock and a regular quarterly cash dividend of $0.3828125 per depositary share on Associated Banc-Corp’s 6.125% Series C Non-Cumulative Perpetual Preferred Stock payable on September 15, 2016, to shareholders of record at the close of business on September 1, 2016. These cash dividends have not been reflected in the accompanying consolidated financial statements.
On July 26, 2016, the Corporation announced it is calling for redemption all of its outstanding depositary shares representing a 1/40th interest in a share of the Corporation’s 8.00% Series B Non-Cumulative Perpetual Preferred Stock (the “Depositary Shares”) on September 15, 2016 (the “Redemption Date”). The Depositary Shares will be redeemed at a redemption price of $25 per Depositary Share, plus an amount equal to any declared and unpaid dividends to the Redemption Date.
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 our 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, 2016 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, 2016. 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 I under Note 12, "Commitments, Off-Balance Sheet Arrangements, and Legal Proceedings."
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Following are the Corporation’s monthly common stock and depositary share purchases during the second quarter of 2016. For additional discussion on the Corporation's common stock and depositary share purchases, see section “Capital” included under Part I Item 2 of this document.
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, 2016 - April 30, 2016

 
$

 

 

May 1, 2016 - May 31, 2016

 

 

 

June 1, 2016 - June 30, 2016

 

 

 

Total

 
$

 

 

(a)
During the second quarter of 2016, the Corporation repurchased approximately 70,000 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 $88 million remained available to repurchase as of June 30, 2016. Using the closing stock price on June 30, 2016 of $17.15, a total of approximately 5.1 million shares of common stock remained available to be repurchased under the previously approved Board authorizations as of June 30, 2016.
Series B Preferred Stock Depositary Share Purchases:
 
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, 2016 - April 30, 2016
3,000

 
$
26.12

 
3,000

 

May 1, 2016 - May 31, 2016
3,000

 
25.92

 
3,000

 

June 1, 2016 - June 30, 2016

 

 

 

Total
6,000

 
$
26.02

 
6,000

 
131,018

(a)
In 2011, the Corporation issued 2,600,000 depositary shares, each representing a 1/40th interest in a share of the Corporation’s 8.00% Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”). During 2013, the Board of Directors authorized the repurchase of up to $10 million of the Series B Preferred Stock. As of June 30, 2016, approximately $3.3 million remained available under this repurchase authorization. Using the closing price on June 30, 2016 of $25.48, a total of approximately 131,000 shares remained available to be repurchased under the previously approved Board authorization as of June 30, 2016.

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Series C Preferred Stock Depositary Share Purchases:
 
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, 2016 - April 30, 2016

 
$

 

 

May 1, 2016 - May 31, 2016

 

 

 

June 1, 2016 - June 30, 2016

 

 

 

Total

 
$

 

 

(a)
In June 2015, the Corporation issued 2,600,000 depositary shares, each representing a 1/40th interest in a share of the Corporation’s 6.125% Non-Cumulative Perpetual Preferred Stock, Series C (the “Series C Preferred Stock”). On August 28, 2015, the Board of Directors authorized the repurchase of up to $10 million of the Series C Preferred Stock. As of June 30, 2016, $10 million remained available under this repurchase authorization as the Corporation has not yet repurchased any of the Series C Preferred Stock under this authorization. Using the closing price on June 30, 2016 of $26.77, a total of approximately 373,000 shares remained available to be repurchased under the previously approved Board authorization as of June 30, 2016.
ITEM 6.
Exhibits
(a)    Exhibits:
Exhibit (3), Articles of Correction, filed with the Wisconsin Department of Financial Institutions on June 14, 2016.
Exhibit (11), Statement regarding computation of per share earnings. See Note 4 of the notes to consolidated financial statements in Part I Item 1.
Exhibit (31.1), Certification Under Section 302 of Sarbanes-Oxley by Philip B. Flynn, Chief Executive Officer.
Exhibit (31.2), Certification Under Section 302 of Sarbanes-Oxley by 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 Sarbanes-Oxley.
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 28, 2016
 
/s/ Philip B. Flynn
 
 
Philip B. Flynn
 
 
President and Chief Executive Officer
 
 
 
Date: July 28, 2016
 
/s/ Christopher J. Del Moral-Niles
 
  
Christopher J. Del Moral-Niles
 
 
Chief Financial Officer and Principal Accounting Officer

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