10-Q 1 pvtb0930201410-q.htm 10-Q PVTB 09.30.2014 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________________
FORM 10-Q
______________________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
¨
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 001-34066
______________________________________________ 
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter)
______________________________________________ 
Delaware
 
36-3681151
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
120 South LaSalle Street,
Chicago, Illinois
 
60603
(Address of principal executive offices)
 
(zip code)
(312) 564-2000
Registrant’s telephone number, including area code
______________________________________________ 
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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  ý    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
 
ý
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ 
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  ý
As of November 5, 2014, there were 77,844,927 shares of the issuer’s voting common stock, without par value, outstanding and 284,879 nonvoting common shares, no par value, outstanding.


PRIVATEBANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands)
 
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Cash and due from banks
$
181,248

 
$
133,518

Federal funds sold and interest-bearing deposits in banks
416,071

 
306,544

Loans held-for-sale
57,748

 
26,816

Securities available-for-sale, at fair value (pledged as collateral to creditors: $90.0 million - 2014; $108.1 million - 2013)
1,541,754

 
1,602,476

Securities held-to-maturity, at amortized cost (fair value: $1.1 billion - 2014; $896.9 million - 2013)
1,072,002

 
921,436

Federal Home Loan Bank ("FHLB") stock
28,666

 
30,005

Loans – excluding covered assets, net of unearned fees
11,547,587

 
10,644,021

Allowance for loan losses
(150,135
)
 
(143,109
)
Loans, net of allowance for loan losses and unearned fees
11,397,452

 
10,500,912

Covered assets
65,482

 
112,746

Allowance for covered loan losses
(4,485
)
 
(16,511
)
Covered assets, net of allowance for covered loan losses
60,997

 
96,235

Other real estate owned, excluding covered assets
17,293

 
28,548

Premises, furniture, and equipment, net
39,611

 
39,704

Accrued interest receivable
39,701

 
37,004

Investment in bank owned life insurance
54,849

 
53,865

Goodwill
94,041

 
94,041

Other intangible assets
6,627

 
8,892

Derivative assets
34,896

 
48,422

Other assets
147,512

 
157,328

Total assets
$
15,190,468

 
$
14,085,746

Liabilities
 
 
 
Demand deposits:
 
 
 
Noninterest-bearing
$
3,342,862

 
$
3,172,676

Interest-bearing
1,433,429

 
1,470,856

Savings deposits and money market accounts
5,368,866

 
4,799,561

Time deposits
1,342,765

 
1,336,522

Brokered time deposits
1,361,282

 
1,234,026

Total deposits
12,849,204

 
12,013,641

Deposits held-for-sale
128,508

 
—

Short-term and secured borrowings
6,563

 
8,400

Long-term debt
656,793

 
627,793

Accrued interest payable
6,987

 
6,326

Derivative liabilities
27,976

 
48,890

Other liabilities
79,128

 
78,792

Total liabilities
13,755,159

 
12,783,842

Equity
 
 
 
Common stock:
 
 
 
Voting
76,858

 
75,240

Nonvoting
285

 
1,585

Treasury stock
(6
)
 
(6,415
)
Additional paid-in capital
1,028,813

 
1,022,023

Retained earnings
313,123

 
199,627

Accumulated other comprehensive income, net of tax
16,236

 
9,844

Total equity
1,435,309

 
1,301,904

Total liabilities and equity
$
15,190,468

 
$
14,085,746

Note: Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
See accompanying notes to consolidated financial statements.

3

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION – (Continued)
(Amounts in thousands, except per share data)
 
September 30, 2014
 
December 31, 2013
 
Preferred
 
Common Stock
 
Preferred
 
Common Stock
 
Stock
 
Voting
 
Nonvoting
 
Stock
 
Voting
 
Nonvoting
Per Share Data
 
 
 
 
 
 
 
 
 
 
 
Par value
None

 
None

 
None

 
None

 
None

 
None

Stated value
None

 
$
1.00

 
$
1.00

 
None

 
$
1.00

 
$
1.00

Share Balances
 
 
 
 
 
 
 
 
 
 
 
Shares authorized
1,000

 
174,000

 
5,000

 
1,000

 
174,000

 
5,000

Shares issued
—

 
77,836

 
285

 
—

 
76,397

 
1,585

Shares outstanding
—

 
77,836

 
285

 
—

 
76,123

 
1,585

Treasury shares
—

 
—

 
—

 
—

 
274

 
—

See accompanying notes to consolidated financial statements.

4

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Interest Income
 
 
 
 
 
 
 
Loans, including fees
$
119,211

 
$
108,912

 
$
343,106

 
$
323,106

Federal funds sold and interest-bearing deposits in banks
142

 
111

 
423

 
431

Securities:
 
 
 
 
 
 
 
Taxable
13,370

 
12,931

 
40,250

 
38,272

Exempt from Federal income taxes
1,529

 
1,562

 
4,490

 
4,596

Other interest income
48

 
61

 
140

 
213

Total interest income
134,300

 
123,577

 
388,409

 
366,618

Interest Expense
 
 
 
 
 
 
 
Interest-bearing demand deposits
918

 
1,032

 
2,702

 
3,181

Savings deposits and money market accounts
4,173

 
3,895

 
12,234

 
12,181

Time and brokered time deposits
5,723

 
5,014

 
15,563

 
15,099

Short-term and secured borrowings
158

 
161

 
495

 
689

Long-term debt
6,570

 
7,640

 
19,554

 
22,861

Total interest expense
17,542

 
17,742

 
50,548

 
54,011

Net interest income
116,758

 
105,835

 
337,861

 
312,607

Provision for loan and covered loan losses
3,890

 
8,120

 
7,924

 
27,320

Net interest income after provision for loan and covered loan losses
112,868

 
97,715

 
329,937

 
285,287

Non-interest Income
 
 
 
 
 
 
 
Asset management
4,240

 
4,570

 
13,027

 
13,764

Mortgage banking
2,904

 
2,946

 
7,162

 
10,314

Capital markets products
3,253

 
3,921

 
12,342

 
15,008

Treasury management
6,935

 
6,214

 
20,210

 
18,347

Loan, letter of credit and commitment fees
4,970

 
4,384

 
14,410

 
12,743

Syndication fees
6,818

 
4,322

 
15,571

 
11,294

Deposit service charges and fees and other income
1,546

 
1,298

 
3,912

 
4,885

Net securities gains
3

 
118

 
530

 
895

Total non-interest income
30,669

 
27,773

 
87,164

 
87,250

Non-interest Expense
 
 
 
 
 
 
 
Salaries and employee benefits
46,421

 
41,360

 
135,446

 
124,354

Net occupancy expense
7,807

 
7,558

 
23,311

 
22,479

Technology and related costs
3,362

 
3,343

 
9,850

 
10,283

Marketing
3,752

 
2,986

 
9,754

 
8,998

Professional services
2,626

 
2,465

 
8,290

 
6,146

Outsourced servicing costs
1,736

 
1,607

 
5,050

 
5,205

Net foreclosed property expenses
1,631

 
4,396

 
7,225

 
16,594

Postage, telephone, and delivery
839

 
852

 
2,591

 
2,676

Insurance
3,077

 
2,590

 
8,996

 
7,933

Loan and collection expense
2,099

 
1,345

 
4,728

 
6,402

Other expenses
4,486

 
2,767

 
13,810

 
16,417

Total non-interest expense
77,836

 
71,269

 
229,051

 
227,487

Income before income taxes
65,701

 
54,219

 
188,050

 
145,050

Income tax provision
25,174

 
21,161

 
72,194

 
55,807

Net income available to common stockholders
$
40,527

 
$
33,058

 
$
115,856

 
$
89,243

Per Common Share Data
 
 
 
 
 
 
 
Basic earnings per share
$
0.52

 
$
0.42

 
$
1.48

 
$
1.15

Diluted earnings per share
$
0.51

 
$
0.42

 
$
1.47

 
$
1.14

Cash dividends declared
$
0.01

 
$
0.01

 
$
0.03

 
$
0.03

Weighted-average common shares outstanding
77,110

 
76,494

 
76,951

 
76,352

Weighted-average diluted common shares outstanding
77,934

 
76,819

 
77,721

 
76,537

See accompanying notes to consolidated financial statements.

5

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited) 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
40,527

 
$
33,058

 
$
115,856

 
$
89,243

Other comprehensive income:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Net unrealized (losses) gains
(7,103
)
 
3,784

 
8,133

 
(37,596
)
Reclassification of net gains included in net income
(3
)
 
(118
)
 
(530
)
 
(895
)
Income tax benefit (expense)
2,757

 
(1,447
)
 
(3,007
)
 
14,976

Net unrealized (losses) gains on available-for-sale securities
(4,349
)
 
2,219

 
4,596

 
(23,515
)
Cash flow hedges:
 
 
 
 
 
 
 
Net unrealized (losses) gains
(2,168
)
 
4,823

 
9,710

 
(6,118
)
Reclassification of net gains included in net income
(2,456
)
 
(1,666
)
 
(6,763
)
 
(4,110
)
Income tax benefit (expense)
1,803

 
(1,233
)
 
(1,151
)
 
4,002

Net unrealized (losses) gains on cash flow hedges
(2,821
)
 
1,924

 
1,796

 
(6,226
)
Other comprehensive (loss) income
(7,170
)
 
4,143

 
6,392

 
(29,741
)
Comprehensive income
$
33,357

 
$
37,201

 
$
122,248

 
$
59,502

See accompanying notes to consolidated financial statements.


6

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in thousands, except per share data)
(Unaudited) 
 
Common
Shares
Out-
standing
 
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumu-
lated
Other
Compre-
hensive
Income
 
Total
Balance at January 1, 2013
77,115

 
 
$
77,015

 
$
(24,150
)
 
$
1,026,438

 
$
79,799

 
$
48,064

 
$
1,207,166

Comprehensive income (loss) (1)
—

 
 
—

 
—

 
—

 
89,243

 
(29,741
)
 
59,502

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock ($0.03 per share)
—

 
 
—

 
—

 
—

 
(2,342
)
 
—

 
(2,342
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonvested (restricted) stock grants
590

 
 
(590
)
 
15,001

 
(14,411
)
 
—

 
—

 
—

Exercise of stock options
164

 
 
5

 
3,755

 
(1,398
)
 
—

 
—

 
2,362

Restricted stock activity
(66
)
 
 
394

 
218

 
(783
)
 
—

 
—

 
(171
)
Deferred compensation plan
13

 
 
1

 
337

 
(63
)
 
—

 
—

 
275

Stock repurchased in connection with share-based compensation plans
(136
)
 
 
—

 
(2,464
)
 
—

 
—

 
—

 
(2,464
)
Share-based compensation expense
—

 
 
—

 
—

 
9,360

 
—

 
—

 
9,360

Balance at September 30, 2013
77,680

 
 
$
76,825

 
$
(7,303
)
 
$
1,019,143

 
$
166,700

 
$
18,323

 
$
1,273,688

Balance at January 1, 2014
77,707

 
 
$
76,825

 
$
(6,415
)
 
$
1,022,023

 
$
199,627

 
$
9,844

 
$
1,301,904

Comprehensive income(1)
—

 
 
—

 
—

 
—

 
115,856

 
6,392

 
122,248

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock ($0.03 per share)
—

 
 
—

 
—

 
—

 
(2,360
)
 
—

 
(2,360
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonvested (restricted) stock grants
376

 
 
(244
)
 
5,607

 
(5,363
)
 
—

 
—

 
—

Exercise of stock options
215

 
 
31

 
5,341

 
(1,370
)
 
—

 
—

 
4,002

Restricted stock activity
(10
)
 
 
531

 
360

 
(891
)
 
—

 
—

 
—

Deferred compensation plan
13

 
 
—

 
384

 
32

 
—

 
—

 
416

Excess tax benefit from share-based compensation
—

 
 
—

 
—

 
2,933

 
—

 
—

 
2,933

Stock repurchased in connection with share-based compensation plans
(180
)
 
 
—

 
(5,283
)
 
—

 
—

 
—

 
(5,283
)
Share-based compensation expense
—

 
 
—

 
—

 
11,449

 
—

 
—

 
11,449

Balance at September 30, 2014
78,121

 
 
$
77,143

 
$
(6
)
 
$
1,028,813

 
$
313,123

 
$
16,236

 
$
1,435,309

(1) 
Net of taxes and reclassification adjustments.
See accompanying notes to consolidated financial statements.

7

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
Operating Activities
 
 
 
Net income
$
115,856

 
$
89,243

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan and covered loan losses
7,924

 
27,320

Depreciation of premises, furniture, and equipment
6,514

 
6,420

Net amortization of premium on securities
10,827

 
12,615

Net gains on sale of securities
(530
)
 
(895
)
Valuation adjustments on other real estate owned
5,260

 
16,320

Net loss (gain) on sale of other real estate owned
358

 
(1,728
)
Net amortization of discount on covered assets
293

 
826

Bank owned life insurance income
(984
)
 
(1,026
)
Net increase (decrease) in deferred loan fees
1,569

 
(5,463
)
Share-based compensation expense
11,449

 
9,360

Excess tax benefit from exercise of stock options and vesting of restricted shares
(3,341
)
 
(622
)
(Benefit) provision for deferred income tax expense
(5,165
)
 
13,171

Amortization of other intangibles
2,265

 
2,342

Originations and purchases of loans held-for-sale
(351,440
)
 
(430,777
)
Proceeds from sales of loans held-for-sale
326,363

 
462,720

Net gains from sales of loans held-for-sale
(5,666
)
 
(9,745
)
Net (increase) decrease in derivative assets and liabilities
(7,388
)
 
4,147

Net increase in accrued interest receivable
(2,697
)
 
(926
)
Net increase (decrease) in accrued interest payable
661

 
(1,099
)
Net decrease in other assets
16,575

 
8,903

Net increase in other liabilities
312

 
4,617

Net cash provided by operating activities
129,015

 
205,723

Investing Activities
 
 
 
Available-for-sale securities:
 
 
 
Proceeds from maturities, prepayments, and calls
176,823

 
258,636

Proceeds from sales
74,690

 
79,962

Purchases
(190,032
)
 
(544,743
)
Held-to-maturity securities:
 
 
 
Proceeds from maturities, prepayments, and calls
86,313

 
98,139

Purchases
(240,332
)
 
(169,682
)
Net redemption of FHLB stock
1,339

 
9,324

Net increase in loans
(909,877
)
 
(317,124
)
Net decrease in covered assets
36,213

 
49,883

Proceeds from sale of other real estate owned
8,213

 
42,646

Net purchases of premises, furniture, and equipment
(6,482
)
 
(3,357
)
Net cash used in investing activities
(963,132
)
 
(496,316
)
Financing Activities
 
 
 
Net increase (decrease) in deposit accounts, including deposits held-for-sale
964,071

 
(341,078
)
Decrease in secured borrowings
(2,837
)
 
—

Net increase in FHLB advances
30,000

 
120,000

Stock repurchased in connection with benefit plans
(5,283
)
 
(2,464
)
Cash dividends paid
(2,336
)
 
(2,336
)
Proceeds from exercise of stock options and issuance of common stock under benefit plans
4,418

 
2,466

Excess tax benefit from exercise of stock options and vesting of restricted shares
3,341

 
622

Net cash provided by (used in) financing activities
991,374

 
(222,790
)
Net increase (decrease) in cash and cash equivalents
157,257

 
(513,383
)
Cash and cash equivalents at beginning of year
440,062

 
941,451

Cash and cash equivalents at end of period
$
597,319

 
$
428,068

See accompanying notes to consolidated financial statements.

8

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Amounts in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
49,887

 
$
55,110

Cash paid for income taxes
70,400

 
25,613

Non-cash transfers of loans to other real estate
2,576

 
10,668

Non-cash transfers of loans to loans held-for-sale
109,885

 
18,046

Non-cash transfers of deposits to deposits held-for-sale
128,508

 
—

See accompanying notes to consolidated financial statements.


9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated interim financial statements of PrivateBancorp, Inc. ("PrivateBancorp" or the "Company"), a Delaware corporation, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include certain information and footnote disclosures required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete annual financial statements. Accordingly, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for our fiscal year ended December 31, 2013.

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with U.S. GAAP and reflect all adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year or any other period.

The accompanying consolidated financial statements include the accounts and results of operations of the Company and its subsidiary, The PrivateBank and Trust Company (the "Bank"), after elimination of all significant intercompany accounts and transactions. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

In preparing the consolidated financial statements, we have considered the impact of events occurring subsequent to September 30, 2014 for potential recognition or disclosure.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

Accounting for Investments in Qualified Affordable Housing Projects - On January 1, 2014, we adopted new accounting guidance issued by the Financial Accounting Standards Board ("FASB") related to the accounting for investments in limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. The guidance allows the Company to elect to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Additionally, the guidance requires disclosure of (1) the nature of the Company’s investments in qualified affordable housing projects and (2) the effect of the measurement of those investments and the related tax credits on the Company’s financial position and results of operations. Prior to the adoption of this new guidance, the Company previously accounted for such investments using the effective yield method. As permitted under the new guidance, the Company has elected to continue accounting for its investments in qualified affordable housing projects that existed prior to the date of adoption using the effective yield method. Any new investments in qualified affordable housing projects entered into on or after January 1, 2014 that meet certain conditions will be accounted for using the proportional amortization method. While the guidance affected our disclosures, adoption of the guidance did not impact our financial position or consolidated results of operations. Refer to Note 18 for the required disclosures.

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity - On July 1, 2014, we adopted new accounting guidance issued by the FASB that changes the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the guidance, a discontinued operation is (1) a component of an entity that has been disposed of or is classified as held-for-sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (2) an acquired business or nonprofit activity that is classified as held-for-sale on the date of the acquisition. The guidance requires new disclosures for disposals that meet the definition of a discontinued operation, and also requires new disclosures for those disposals that are individually significant but do not meet the definition of a discontinued operation. The guidance must be applied prospectively. The adoption of this guidance did not impact our financial position or consolidated results of operations.

Accounting Pronouncements Pending Adoption

Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure - In August 2014, the FASB issued guidance that requires a creditor to derecognize a mortgage loan upon foreclosure and recognize a separate other receivable if the

10

following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable is measured based on the amount of the loan balance expected to be recovered from the guarantor. The guidance will be effective for the Company’s financial statements beginning January 1, 2015. The adoption of this guidance is not expected to have a material impact on our financial position or consolidated results of operations.

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans - In January 2014, the FASB issued guidance that clarifies when the Company should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The guidance indicates that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or similar legal agreement. Additionally, the guidance requires disclosure of (1) the amount of foreclosed residential real estate property held by the Company and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The guidance will be effective for the Company’s financial statements beginning January 1, 2015. The adoption of this guidance is not expected to have a material impact on our financial position or consolidated results of operations.

Revenue from Contracts with Customers - In May 2014, the FASB issued a comprehensive new revenue recognition standard that will replace most of the existing revenue recognition guidance in U.S. GAAP. All arrangements involving the transfer of goods or services to customers are within the scope of the guidance, except for certain contracts subject to other U.S. GAAP guidance, including lease contracts and rights and obligations related to financial instruments. The standard’s core principle is that an entity should recognize revenue when it transfers 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. The guidance also includes new disclosure requirements related to the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance will be effective for the Company’s financial statements beginning January 1, 2017. The Company may choose to apply the new standard either retrospectively or through a cumulative effect adjustment as of January 1, 2017. The Company is in the process of determining the effect of the new guidance on our financial position and consolidated results of operations, as well as which transition method to use.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures - In June 2014, the FASB issued guidance that amends the accounting for repurchase-to-maturity transactions and repurchase financings. Under the new guidance, repurchase-to-maturity transactions will be accounted for as secured borrowings. Additionally, the initial transfer and related repurchase agreement in a repurchase financing will need to be considered separately, rather than as a linked transaction. In addition, new disclosures will be required for (1) repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings, and (2) transfers accounted for as sales when the transferor also retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The guidance will be effective for the Company’s financial statements beginning January 1, 2015, except for the disclosures related to transactions accounted for as secured borrowings, which will be effective for the Company’s financial statements that include periods beginning on April 1, 2015. The adoption of this guidance is not expected to have a material impact on our financial position or consolidated results of operations.

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period - In June 2014, the FASB issued guidance that clarifies the accounting for a performance target that affects vesting of a share-based payment award and that could be achieved after the requisite service period. The guidance indicates that such a performance target would not be reflected in the estimation of the award’s grant date fair value. Rather, compensation cost for such an award would be recognized over the requisite service period, if it is probable that the performance target will be achieved. The total amount of compensation cost recognized during and after the requisite service period would reflect the number of awards that are expected to vest and would be adjusted to reflect those awards that ultimately vest. The guidance will be effective for the Company’s financial statements that include periods beginning January 1, 2016 and applied prospectively to awards that are granted or modified after the effective date. The adoption of this guidance is not expected to have a material impact on our financial position or consolidated results of operations.

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern - In August 2014, the FASB issued guidance that requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern. The guidance requires new disclosures to the extent management concludes there is substantial

11

doubt about an entity’s ability to continue as a going concern. The guidance will be effective for the Company’s annual financial statements dated December 31, 2016, as well as interim periods thereafter. The adoption of this guidance is not expected to have a material impact on our financial position or consolidated results of operations.

3. SECURITIES

Securities Portfolio
(Amounts in thousands)

 
September 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
 
 
Gains
 
Losses
 
 
 
Gains
 
Losses
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
170,568

 
$
—

 
$
(2,216
)
 
$
168,352

 
$
145,716

 
$
—

 
$
(3,141
)
 
$
142,575

U.S. Agency
47,073

 
—

 
(1,138
)
 
45,935

 
47,409

 
—

 
(1,881
)
 
45,528

Collateralized mortgage obligations
143,164

 
5,093

 
(29
)
 
148,228

 
169,775

 
6,356

 
(15
)
 
176,116

Residential mortgage-backed securities
839,837

 
23,335

 
(3,734
)
 
859,438

 
946,656

 
23,627

 
(7,176
)
 
963,107

State and municipal securities
311,724

 
8,182

 
(605
)
 
319,301

 
271,135

 
6,627

 
(3,112
)
 
274,650

Foreign sovereign debt
500

 
—

 
—

 
500

 
500

 
—

 
—

 
500

Total
$
1,512,866

 
$
36,610

 
$
(7,722
)
 
$
1,541,754

 
$
1,581,191

 
$
36,610

 
$
(15,325
)
 
$
1,602,476

Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
62,162

 
$
—

 
$
(2,684
)
 
$
59,478

 
$
67,335

 
$
—

 
$
(3,263
)
 
$
64,072

Residential mortgage-backed securities
833,513

 
3,692

 
(6,266
)
 
830,939

 
688,410

 
637

 
(15,274
)
 
673,773

Commercial mortgage-backed securities
175,862

 
233

 
(3,532
)
 
172,563

 
164,607

 
6

 
(6,640
)
 
157,973

State and municipal securities
465

 
5

 
—

 
470

 
1,084

 
6

 
—

 
1,090

Total
$
1,072,002

 
$
3,930

 
$
(12,482
)
 
$
1,063,450

 
$
921,436

 
$
649

 
$
(25,177
)
 
$
896,908


The carrying value of securities pledged to secure public deposits, FHLB advances, trust deposits, Federal Reserve Bank ("FRB") discount window borrowing availability, derivative transactions, standby letters of credit with counterparty banks and for other purposes as permitted or required by law, totaled $374.1 million and $401.4 million at September 30, 2014 and December 31, 2013, respectively. Of total pledged securities, securities pledged to creditors under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties totaled $90.0 million and $108.1 million at September 30, 2014 and December 31, 2013, respectively.

Excluding securities issued or backed by the U.S. Government and its agencies and U.S. Government-sponsored enterprises, there were no investments in securities from one issuer that exceeded 10% of consolidated equity at September 30, 2014 or December 31, 2013.


12

The following table presents the fair values of securities with unrealized losses as of September 30, 2014 and December 31, 2013. The securities presented are grouped according to the time periods during which the securities have been in a continuous unrealized loss position.

Securities in Unrealized Loss Position
(Amounts in thousands)
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
As of September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
45,594

 
$
(122
)
 
$
122,759

 
$
(2,094
)
 
$
168,353

 
$
(2,216
)
U.S. Agency
—

 
—

 
45,934

 
(1,138
)
 
45,934

 
(1,138
)
Collateralized mortgage obligations
4,905

 
(29
)
 
—

 
—

 
4,905

 
(29
)
Residential mortgage-backed securities
113,918

 
(361
)
 
110,427

 
(3,373
)
 
224,345

 
(3,734
)
State and municipal securities
30,833

 
(177
)
 
35,145

 
(428
)
 
65,978

 
(605
)
Total
$
195,250

 
$
(689
)
 
$
314,265

 
$
(7,033
)
 
$
509,515

 
$
(7,722
)
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
139,847

 
$
(482
)
 
$
240,361

 
$
(5,784
)
 
$
380,208

 
$
(6,266
)
Commercial mortgage-backed securities
39,976

 
(157
)
 
104,557

 
(3,375
)
 
144,533

 
(3,532
)
Collateralized mortgage obligations
—

 
—

 
59,478

 
(2,684
)
 
59,478

 
(2,684
)
Total
$
179,823

 
$
(639
)
 
$
404,396

 
$
(11,843
)
 
$
584,219

 
$
(12,482
)
As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
142,575

 
$
(3,141
)
 
$
—

 
$
—

 
$
142,575

 
$
(3,141
)
U.S. Agency
45,528

 
(1,881
)
 
—

 
—

 
45,528

 
(1,881
)
Collateralized mortgage obligations
3,409

 
(15
)
 
—

 
—

 
3,409

 
(15
)
Residential mortgage-backed securities
276,657

 
(7,176
)
 
—

 
—

 
276,657

 
(7,176
)
State and municipal securities
104,442

 
(2,812
)
 
10,325

 
(300
)
 
114,767

 
(3,112
)
Total
$
572,611

 
$
(15,025
)
 
$
10,325

 
$
(300
)
 
$
582,936

 
$
(15,325
)
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
556,410

 
$
(14,908
)
 
$
3,327

 
$
(366
)
 
$
559,737

 
$
(15,274
)
Commercial mortgage-backed securities
123,021

 
(4,674
)
 
25,240

 
(1,966
)
 
148,261

 
(6,640
)
Collateralized mortgage obligations
64,072

 
(3,263
)
 
—

 
—

 
64,072

 
(3,263
)
Total
$
743,503

 
$
(22,845
)
 
$
28,567

 
$
(2,332
)
 
$
772,070

 
$
(25,177
)

There were $718.7 million of securities with $18.9 million in an unrealized loss position for greater than 12 months at September 30, 2014. At December 31, 2013, there were $38.9 million of securities with $2.6 million in an unrealized loss position for greater than 12 months. The Company does not consider these unrealized losses to be credit-related. These unrealized losses relate to changes in interest rates and market spreads. We do not intend to sell the securities and we do not believe it is more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity. Accordingly, no other-than-temporary impairments have been recorded on these securities during the nine months ended September 30, 2014 or during 2013.


13

The following table presents the remaining contractual maturity of securities as of September 30, 2014 by amortized cost and fair value.

Remaining Contractual Maturity of Securities
(Amounts in thousands)

 
September 30, 2014
 
Available-For-Sale Securities
 
Held-To-Maturity Securities
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
U.S. Treasury, U.S. Agency, state and municipal and foreign sovereign debt securities:
 
 
 
 
 
 
 
One year or less
$
5,421

 
$
5,462

 
$
95

 
$
95

One year to five years
341,182

 
342,460

 
370

 
375

Five years to ten years
172,565

 
175,315

 
—

 
—

After ten years
10,697

 
10,851

 
—

 
—

All other securities:
 
 
 
 
 
 
 
Collateralized mortgage obligations
143,164

 
148,228

 
62,162

 
59,478

Residential mortgage-backed securities
839,837

 
859,438

 
833,513

 
830,939

Commercial mortgage-backed securities
—

 
—

 
175,862

 
172,563

Total
$
1,512,866

 
$
1,541,754

 
$
1,072,002

 
$
1,063,450


The following table presents gains (losses) on securities for the quarters and nine months ended September 30, 2014 and 2013.

Securities Gains (Losses)
(Amounts in thousands)

 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Proceeds from sales
$
1,041

 
$
27,116

 
$
74,690

 
$
79,962

Gross realized gains
$
5

 
$
118

 
$
615

 
$
896

Gross realized losses
(2
)
 
—

 
(85
)
 
(1
)
Net realized gains
$
3

 
$
118

 
$
530

 
$
895

Income tax provision on net realized gains
$
1

 
$
47

 
$
209

 
$
353


Refer to Note 11 for additional details of the securities available-for-sale portfolio and the related impact of unrealized gains (losses) on other comprehensive income.


14

4. LOANS

The following loan portfolio and credit quality disclosures exclude covered loans. Covered loans represent loans acquired through a Federal Deposit Insurance Corporation ("FDIC") assisted transaction that are subject to a loss share agreement and are presented separately in the Consolidated Statements of Financial Condition. Refer to Note 6 for a detailed discussion regarding covered loans.

Loan Portfolio
(Amounts in thousands)
 
 
September 30,
2014
 
December 31,
2013
Commercial and industrial
$
6,112,715

 
$
5,457,574

Commercial - owner-occupied CRE
1,792,686

 
1,674,260

Total commercial
7,905,401

 
7,131,834

Commercial real estate
2,103,378

 
1,987,307

Commercial real estate - multi-family
546,641

 
513,194

Total commercial real estate
2,650,019

 
2,500,501

Construction
307,066

 
293,387

Residential real estate
343,573

 
341,868

Home equity
141,159

 
149,732

Personal
200,369

 
226,699

Total loans
$
11,547,587

 
$
10,644,021

Deferred loan fees, net of costs, included as a reduction in total loans
$
38,632

 
$
37,063

Overdrawn demand deposits included in total loans
$
2,720

 
$
2,772


We primarily lend to businesses and consumers in the market areas in which we have physical locations. We seek to diversify our loan portfolio by loan type, industry, and borrower.

Loans Held-For-Sale
(Amounts in thousands)

 
September 30,
2014
 
December 31,
2013
Mortgage loans held-for-sale (1)
$
18,402

 
$
17,619

Other loans held-for-sale (2)
39,346

 
9,197

Total loans held-for-sale
$
57,748

 
$
26,816

(1) 
Comprised of residential mortgage loan originations intended to be sold in the secondary market. The Company accounts for these loans under the fair value option. Refer to Note 16 for additional information regarding mortgage loans held-for-sale.
(2) 
Amounts at September 30, 2014 represent commercial, commercial real estate, home equity and personal loans held-for-sale in connection with the pending sale of the Company's branch office located in Norcross, Georgia, which is expected to close before the end of 2014, subject to regulatory approval and certain other customary closing conditions. Amounts at December 31, 2013 represent commercial loans carried at the lower of aggregate cost or fair value. Generally, the Company intends to sell these loans within 30-60 days from the date the intent to sell was established.


15

Carrying Value of Loans Pledged
(Amounts in thousands)
 
 
September 30,
2014
 
December 31,
2013
Loans pledged to secure outstanding borrowings or availability:
 
 
 
FRB discount window borrowings (1)
$
535,759

 
$
710,269

FHLB advances (2)
1,555,165

 
1,337,552

Total
$
2,090,924

 
$
2,047,821

(1) 
No borrowings were outstanding at September 30, 2014 or December 31, 2013.
(2) 
Refer to Notes 8 and 9 for additional information regarding FHLB advances.

Loan Portfolio Aging

Loan Portfolio Aging
(Amounts in thousands)

 
 
 
Delinquent
 
 
 
 
 
 
 
Current
 
30 – 59
Days Past Due
 
60 – 89
Days Past Due
 
90 Days Past
Due and
Accruing
 
Total
Accruing
Loans
 
Nonaccrual
 
Total Loans
As of September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
7,871,751

 
$
4

 
$
298

 
$
—

 
$
7,872,053

 
$
33,348

 
$
7,905,401

Commercial real estate
2,628,709

 
140

 
2,091

 
—

 
2,630,940

 
19,079

 
2,650,019

Construction
307,066

 
—

 
—

 
—

 
307,066

 
—

 
307,066

Residential real estate
333,479

 
17

 
354

 
—

 
333,850

 
9,723

 
343,573

Home equity
129,879

 
545

 
—

 
—

 
130,424

 
10,735

 
141,159

Personal
199,817

 
5

 
3

 
—

 
199,825

 
544

 
200,369

Total loans
$
11,470,701

 
$
711

 
$
2,746

 
$
—

 
$
11,474,158

 
$
73,429

 
$
11,547,587

As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
7,106,900

 
$
2

 
$
153

 
$
—

 
$
7,107,055

 
$
24,779

 
$
7,131,834

Commercial real estate
2,447,441

 
5,946

 
161

 
—

 
2,453,548

 
46,953

 
2,500,501

Construction
293,387

 
—

 
—

 
—

 
293,387

 
—

 
293,387

Residential real estate
330,922

 
674

 
296

 
—

 
331,892

 
9,976

 
341,868

Home equity
136,341

 
1,108

 
404

 
—

 
137,853

 
11,879

 
149,732

Personal
225,922

 
124

 
2

 
—

 
226,048

 
651

 
226,699

Total loans
$
10,540,913

 
$
7,854

 
$
1,016

 
$
—

 
$
10,549,783

 
$
94,238

 
$
10,644,021


Impaired Loans

Impaired loans consist of nonaccrual loans (which include nonaccrual troubled debt restructurings ("TDRs")) and loans classified as accruing TDRs. A loan is considered impaired when, based on current information and events, either (i) management believes that it is probable that we will be unable to collect all amounts due (both principal and interest) according to the original contractual terms of the loan agreement, or (ii) it has been classified as a TDR.


16

The following two tables present our recorded investment in impaired loans outstanding by product segment, including our recorded investment in impaired loans, which represents the principal amount outstanding, net of unearned income, deferred loan fees and costs, and any direct principal charge-offs.

Impaired Loans
(Amounts in thousands)
 
Unpaid
Contractual
Principal
Balance
 
Recorded
Investment
With No
Specific
Reserve
 
Recorded
Investment
With
Specific
Reserve
 
Total
Recorded
Investment
 
Specific
Reserve
As of September 30, 2014
 
 
 
 
 
 
 
 
 
Commercial
$
59,235

 
$
24,115

 
$
29,134

 
$
53,249

 
$
13,982

Commercial real estate
26,401

 
7,426

 
12,460

 
19,886

 
3,223

Residential real estate
11,548

 
4,963

 
4,760

 
9,723

 
497

Home equity
12,722

 
3,491

 
8,672

 
12,163

 
1,224

Personal
544

 
—

 
544

 
544

 
55

Total impaired loans
$
110,450

 
$
39,995

 
$
55,570

 
$
95,565

 
$
18,981

As of December 31, 2013
 
 
 
 
 
 
 
 
 
Commercial
$
44,471

 
$
30,039

 
$
11,774

 
$
41,813

 
$
4,895

Commercial real estate
61,112

 
10,301

 
38,203

 
48,504

 
12,536

Residential real estate
11,823

 
2,629

 
7,347

 
9,976

 
2,412

Home equity
13,893

 
2,567

 
10,903

 
13,470

 
2,386

Personal
651

 
—

 
651

 
651

 
148

Total impaired loans
$
131,950

 
$
45,536

 
$
68,878

 
$
114,414

 
$
22,377


Average Recorded Investment and Interest Income Recognized on Impaired Loans (1) 
(Amounts in thousands)
 
Quarter Ended September 30,
 
2014
 
2013
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial
$
54,559

 
$
428

 
$
78,010

 
$
636

Commercial real estate
23,841

 
16

 
52,914

 
34

Residential real estate
9,522

 
—

 
12,126

 
—

Home equity
11,696

 
22

 
14,841

 
24

Personal
560

 
—

 
1,449

 
—

Total
$
100,178

 
$
466

 
$
159,340

 
$
694

 
Nine Months Ended September 30,
 
2014
 
2013
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial
$
49,593

 
$
1,229

 
$
79,363

 
$
1,889

Commercial real estate
36,351

 
60

 
66,306

 
364

Residential real estate
9,665

 
—

 
12,285

 
3

Home equity
12,628

 
67

 
14,761

 
84

Personal
609

 
—

 
3,409

 
—

Total
$
108,846

 
$
1,356

 
$
176,124

 
$
2,340

(1) 
Represents amounts while classified as impaired for the periods presented.

17

Credit Quality Indicators

We have adopted an internal risk rating policy in which each loan is rated for credit quality with a numerical rating of 1 through 8. Loans rated 5 and better (1-5 ratings, inclusive) are credits that we believe exhibit acceptable financial performance, cash flow, and leverage. We attempt to mitigate risk by loan structure, collateral, monitoring, and other credit risk management controls. Credits rated 6 are performing in accordance with contractual terms but are considered "special mention" as these credits demonstrate potential weakness that if left unresolved, may result in deterioration in the Company’s credit position and/or the repayment prospects for the credit. Borrowers rated special mention may exhibit adverse operating trends, high leverage, tight liquidity or other credit concerns. Loans rated 7 may be classified as either accruing ("potential problem") or nonaccrual ("nonperforming"). Potential problem loans, like special mention, are loans that are performing in accordance with contractual terms, but for which management has some level of concern (greater than that of special mention loans) about the ability of the borrowers to meet existing repayment terms in future periods. These loans continue to accrue interest but the ultimate collection of these loans in full is questionable due to the same conditions that characterize a 6-rated credit. These credits may also have somewhat increased risk profiles as a result of the current net worth and/or paying capacity of the obligor or guarantors or the value of the collateral pledged. These loans generally have a well-defined weakness that may jeopardize collection of the debt and are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not resolved. Although these loans are generally identified as potential problem loans and require additional attention by management, they may never become nonperforming. Nonperforming loans include nonaccrual loans risk rated 7 or 8 and have all the weaknesses inherent in a 7-rated potential problem loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently-existing facts, conditions and values, highly questionable and improbable. Special mention, potential problem and nonperforming loans are reviewed at a minimum on a quarterly basis, while all other rated credits over a certain dollar threshold, depending on loan type, are reviewed annually or more frequently as the circumstances warrant.

Credit Quality Indicators
(Dollars in thousands)
 
 
Special
Mention
 
% of
Portfolio
Loan
Type
 
 
Potential
Problem
Loans
 
% of
Portfolio
Loan
Type
 
 
Non-
Performing
Loans
 
% of
Portfolio
Loan
Type
 
 
Total Loans
As of September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
69,385

 
0.9
 
 
$
110,703

 
1.4
 
 
$
33,348

 
0.4
 
 
$
7,905,401

Commercial real estate
3,393

 
0.1
 
 
433

 
*
 
 
19,079

 
0.7
 
 
2,650,019

Construction
—

 
—
 
 
—

 
—
 
 
—

 
—
 
 
307,066

Residential real estate
2,696

 
0.8
 
 
6,496

 
1.9
 
 
9,723

 
2.8
 
 
343,573

Home equity
977

 
0.7
 
 
2,100

 
1.5
 
 
10,735

 
7.6
 
 
141,159

Personal
160

 
0.1
 
 
38

 
*
 
 
544

 
0.3
 
 
200,369

Total
$
76,611

 
0.7
 
 
$
119,770

 
1.0
 
 
$
73,429

 
0.6
 
 
$
11,547,587

As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
62,272

 
0.9
 
 
$
87,391

 
1.2
 
 
$
24,779

 
0.3
 
 
$
7,131,834

Commercial real estate
1,016

 
*
 
 
4,489

 
0.2
 
 
46,953

 
1.9
 
 
2,500,501

Construction
—

 
—
 
 
—

 
—
 
 
—

 
—
 
 
293,387

Residential real estate
4,898

 
1.4
 
 
7,177

 
2.1
 
 
9,976

 
2.9
 
 
341,868

Home equity
2,884

 
1.9
 
 
2,538

 
1.7
 
 
11,879

 
7.9
 
 
149,732

Personal
187

 
0.1
 
 
177

 
0.1
 
 
651

 
0.3
 
 
226,699

Total
$
71,257

 
0.7
 
 
$
101,772

 
1.0
 
 
$
94,238

 
0.9
 
 
$
10,644,021

*
Less than 0.1%


18

Troubled Debt Restructured Loans

Troubled Debt Restructured Loans Outstanding
(Amounts in thousands)
 
 
September 30, 2014
 
December 31, 2013
 
Accruing
 
Nonaccrual (1)
 
Accruing
 
Nonaccrual (1)
Commercial
$
19,901

 
$
17,746

 
$
17,034

 
$
6,188

Commercial real estate
807

 
8,103

 
1,551

 
19,309

Residential real estate
—

 
1,512

 
—

 
2,239

Home equity
1,428

 
4,940

 
1,591

 
3,805

Personal
—

 
527

 
—

 
641

Total
$
22,136

 
$
32,828

 
$
20,176

 
$
32,182

(1) 
Included in nonperforming loans.

At September 30, 2014 and December 31, 2013, credit commitments to lend additional funds to debtors whose loan terms have been modified in a TDR (both accruing and nonaccruing) totaled $13.1 million and $5.5 million, respectively.

Additions to Accruing Troubled Debt Restructurings During the Period
(Dollars in thousands)
 
 
Quarter Ended September 30,
 
2014
 
2013
 
Number of
Borrowers
 
Recorded Investment (1)
 
Number of
Borrowers
 
Recorded Investment (1)
 
 
Pre-
Modification
 
Post-
Modification
 
 
Pre-
Modification
 
Post-
Modification
Commercial
 
 
 
 
 
 
 
 
 
 
 
Extension of maturity date (2)
1

 
$
16,325

 
$
16,325

 
1

 
$
2,131

 
$
2,131

Other concession (3)
1

 
1,904

 
1,904

 
—

 
—

 
—

Total accruing
2

 
$
18,229

 
$
18,229

 
1

 
$
2,131

 
$
2,131

 
Nine Months Ended September 30,
 
2014
 
2013
 
 
 
Recorded Investment (1)
 
 
 
Recorded Investment (1)
 
Number of
Borrowers
 
Pre-
Modification
 
Post-
Modification
 
Number of
Borrowers
 
Pre-
Modification
 
Post-
Modification
Commercial
 
 
 
 
 
 
 
 
 
 
 
Extension of maturity date (2)
3

 
$
20,075

 
$
20,075

 
5

 
$
7,066

 
$
7,066

Other concession (3)
3

 
17,483

 
17,483

 
—

 
—

 
—

Total commercial
6

 
37,558

 
37,558

 
5

 
7,066

 
7,066

Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
Other concession (3)
1

 
426

 
426

 
—

 
—

 
—

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
Extension of maturity date (2)
—

 
—

 
—

 
1

 
150

 
150

Total accruing
7

 
$
37,984

 
$
37,984

 
6

 
$
7,216

 
$
7,216

(1) 
Represents amounts as of the date immediately prior to and immediately after the modification is effective.
(2) 
Extension of maturity date also includes loans renewed at existing rate of interest which is considered a below market rate for that particular loan’s risk profile.
(3) 
Other concessions primarily include interest rate reductions, loan increases, or deferrals of principal.


19

Additions to Nonaccrual Troubled Debt Restructurings During the Period
(Dollars in thousands)
 
Quarter Ended September 30,
 
2014
 
2013
 
Number of
Borrowers
 
Recorded Investment (1)
 
Number of
Borrowers
 
Recorded Investment (1)
 
 
Pre-
Modification
 
Post-
Modification
 
 
Pre-
Modification
 
Post-
Modification
Commercial
 
 
 
 
 
 
 
 
 
 
 
Extension of maturity date (2)
—

 
$
—

 
$
—

 
1

 
$
200

 
$
200

Other concession (3)
4

 
17,046

 
17,046

 
1

 
70

 
70

Total commercial
4

 
17,046

 
17,046

 
2

 
270

 
270

Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
Other concession (3)
1

 
653

 
686

 
—

 
—

 
—

Home equity
 
 
 
 
 
 
 
 
 
 
 
Extension of maturity date (3)
—

 
—

 
—

 
2

 
348

 
348

Other concession (3)
1

 
544

 
607

 
3

 
550

 
550

Total home equity
1

 
544

 
607

 
5

 
898

 
898

Personal
 
 
 
 
 
 
 
 
 
 
 
Other concession (3)
—

 
—

 
—

 
2

 
478

 
478

Total nonaccrual
6

 
$
18,243

 
$
18,339

 
9

 
$
1,646

 
$
1,646

 
Nine Months Ended September 30,
 
2014
 
2013
 
 
 
Recorded Investment (1)
 
 
 
Recorded Investment (1)
 
Number of
Borrowers
 
Pre-
Modification
 
Post-
Modification
 
Number of
Borrowers
 
Pre-
Modification
 
Post-
Modification
Commercial
 
 
 
 
 
 
 
 
 
 
 
Extension of maturity date (2)
—

 
$
—

 
$
—

 
2

 
$
334

 
$
334

Other concession (3)
8

 
17,599

 
17,549

 
4

 
1,740

 
1,740

Total commercial
8

 
17,599

 
17,549

 
6

 
2,074

 
2,074

Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
Extension of maturity date (2)
—

 
—

 
—

 
1

 
297

 
297

Other concession (3)
2

 
1,773

 
1,806

 
—

 
—

 
—

Total commercial real estate
2

 
1,773

 
1,806

 
1

 
297

 
297

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
Other concession (3)
3

 
496

 
566

 
—

 
—

 
—

Home equity
 
 
 
 
 
 
 
 
 
 
 
Extension of maturity date (2)
1

 
114

 
114

 
5

 
824

 
824

Other concession (3)
4

 
1,659

 
1,722

 
7

 
1,572

 
1,565

Total home equity
5

 
1,773

 
1,836

 
12

 
2,396

 
2,389

Personal
 
 
 
 
 
 
 
 
 
 
 
Other concession (3)
—

 
—

 
—

 
2

 
478

 
478

Total nonaccrual
18

 
$
21,641

 
$
21,757

 
21

 
$
5,245

 
$
5,238

(1) 
Represents amounts as of the date immediately prior to and immediately after the modification is effective.
(2) 
Extension of maturity date also includes loans renewed at existing rate of interest which is considered a below market rate for that particular loan’s risk profile.
(3) 
Other concessions primarily include interest rate reductions, loan increases or deferrals of principal.


20

At the time an accruing loan becomes modified and meets the definition of a TDR, it is considered impaired and no longer included as part of the general loan loss reserve calculation. However, our general reserve methodology considers the amount and product type of the TDRs removed as a proxy for potentially heightened risk in the portfolio when establishing final reserve requirements.

As impaired loans, TDRs (both accruing and nonaccruing) are evaluated for impairment at the end of each quarter with a specific valuation reserve created, or adjusted (either individually or as part of a pool), if necessary, as a component of the allowance for loan losses. Refer to the "Impaired Loan" and "Allowance for Loan Loss" sections of Note 1, "Summary of Significant Accounting Policies," to the Notes to Consolidated Financial Statements of our 2013 Annual Report on Form 10-K regarding our policy for assessing potential impairment on such loans. Our allowance for loan losses included $9.4 million and $8.6 million in specific reserves for nonaccrual TDRs at September 30, 2014 and December 31, 2013, respectively. For accruing TDRs, there were specific reserves of $34,000 and $37,000 at September 30, 2014 and December 31, 2013, respectively, with the specific reserve representing the difference between the present value of cash flows for the restructured loan as compared to the recorded investment in the loan.

The following table presents the recorded investment and number of loans modified as an accruing TDR during the previous 12 months which subsequently became nonperforming during the nine months ended September 30, 2014 and 2013. A loan becomes nonperforming and placed on nonaccrual status typically when the principal or interest payments are 90 days past due based on contractual terms or when an individual analysis of a borrower’s creditworthiness indicates a loan should be placed on nonaccrual status earlier than when the loan becomes 90 days past due.

Accruing Troubled Debt Restructurings
Reclassified as Nonperforming Within 12 Months of Restructuring
(Dollars in thousands)
 
 
2014
 
2013
 
Number of
Borrowers
 
Recorded
Investment (1)
 
Number of
Borrowers
 
Recorded
Investment (1)
Quarter Ended September 30,
 
 
 
 
 
 
 
None
—

 
$
—

 
—

 
$
—

Nine Months Ended September 30,
 
 
 
 
 
 
 
Commercial real estate
1

 
$
699

 
2

 
$
5,258

(1) 
Represents amounts as of the balance sheet date from the quarter the default was first reported.


21

5. ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED COMMITMENTS

The following allowance and credit quality disclosures exclude covered loans. Refer to Note 6 for additional information regarding covered loans.

Allowance for Loan Losses and Recorded Investment in Loans
(Amounts in thousands)
 
 
Quarter Ended September 30, 2014
 
Commercial
 
Commercial
Real
Estate
 
Construction
 
Residential
Real
Estate
 
Home
Equity
 
Personal
 
Total
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
96,326

 
$
33,299

 
$
3,621

 
$
5,280

 
$
5,015

 
$
2,950

 
$
146,491

Loans charged-off
(227
)
 
(1,133
)
 
(7
)
 
(252
)
 
(172
)
 
(8
)
 
(1,799
)
Recoveries on loans previously charged-off
1,145

 
356

 
6

 
9

 
67

 
128

 
1,711

Net recoveries (charge-offs)
918

 
(777
)
 
(1
)
 
(243
)
 
(105
)
 
120

 
(88
)
Provision (release) for loan losses
6,642

 
(2,135
)
 
409

 
(25
)
 
(661
)
 
(498
)
 
3,732

Balance at end of period
$
103,886

 
$
30,387

 
$
4,029

 
$
5,012

 
$
4,249

 
$
2,572

 
$
150,135

Ending balance, loans individually evaluated for impairment (1)
$
13,982

 
$
3,223

 
$
—

 
$
497

 
$
1,224

 
$
55

 
$
18,981

Ending balance, loans collectively evaluated for impairment
$
89,904

 
$
27,164

 
$
4,029

 
$
4,515

 
$
3,025

 
$
2,517

 
$
131,154

Recorded Investment in Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance, loans individually evaluated for impairment (1)
$
53,249

 
$
19,886

 
$
—

 
$
9,723

 
$
12,163

 
$
544

 
$
95,565

Ending balance, loans collectively evaluated for impairment
7,852,152

 
2,630,133

 
307,066

 
333,850

 
128,996

 
199,825

 
11,452,022

Total recorded investment in loans
$
7,905,401

 
$
2,650,019

 
$
307,066

 
$
343,573

 
$
141,159

 
$
200,369

 
$
11,547,587

(1) 
Refer to Note 4 for additional information regarding impaired loans.
 

22

Allowance for Loan Losses and Recorded Investment in Loans (Continued)
(Amounts in thousands)

 
Quarter Ended September 30, 2013
 
Commercial
 
Commercial
Real
Estate
 
Construction
 
Residential
Real
Estate
 
Home
Equity
 
Personal
 
Total
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
80,674

 
$
46,489

 
$
2,626

 
$
9,046

 
$
6,040

 
$
3,308

 
$
148,183

Loans charged-off
(7,285
)
 
(1,706
)
 
—

 
(395
)
 
(2,146
)
 
(893
)
 
(12,425
)
Recoveries on loans previously charged-off
1,301

 
366

 
7

 
7

 
135

 
142

 
1,958

Net (charge-offs) recoveries
(5,984
)
 
(1,340
)
 
7

 
(388
)
 
(2,011
)
 
(751
)
 
(10,467
)
Provision (release) for loan losses
3,376

 
2,825

 
681

 
(493
)
 
1,157

 
251

 
7,797

Balance at end of period
$
78,066

 
$
47,974

 
$
3,314

 
$
8,165

 
$
5,186

 
$
2,808

 
$
145,513

Ending balance, loans individually evaluated for impairment (1)
$
3,332

 
$
17,131

 
$
—

 
$
3,911

 
$
2,234

 
$
90

 
$
26,698

Ending balance, loans collectively evaluated for impairment
$
74,734

 
$
30,843

 
$
3,314

 
$
4,254

 
$
2,952

 
$
2,718

 
$
118,815

Recorded Investment in Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance, loans individually evaluated for impairment (1)
$
56,960

 
$
63,619

 
$
—

 
$
11,237

 
$
13,049

 
$
764

 
$
145,629

Ending balance, loans collectively evaluated for impairment
6,931,732

 
2,424,477

 
237,440

 
335,382

 
135,009

 
199,774

 
10,263,814

Total recorded investment in loans
$
6,988,692

 
$
2,488,096

 
$
237,440

 
$
346,619

 
$
148,058

 
$
200,538

 
$
10,409,443

(1) 
Refer to Note 4 for additional information regarding impaired loans.


23

Allowance for Loan Losses (Continued)
(Amounts in thousands)

 
Nine Months Ended September 30,
 
Commercial
 
Commercial
Real
Estate
 
Construction
 
Residential
Real
Estate
 
Home
Equity
 
Personal
 
Total
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
$
80,768

 
$
42,362

 
$
3,338

 
$
7,555

 
$
5,648

 
$
3,438

 
$
143,109

Loans charged-off
(3,856
)
 
(5,797
)
 
(7
)
 
(667
)
 
(887
)
 
(151
)
 
(11,365
)
Recoveries on loans previously charged-off
5,620

 
2,404

 
22

 
444

 
155

 
554

 
9,199

Net recoveries (charge-offs)
1,764

 
(3,393
)
 
15

 
(223
)
 
(732
)
 
403

 
(2,166
)
Provision (release) for loan losses
21,354

 
(8,582
)
 
676

 
(2,320
)
 
(667
)
 
(1,269
)
 
9,192

Balance at end of period
$
103,886

 
$
30,387

 
$
4,029

 
$
5,012

 
$
4,249

 
$
2,572

 
$
150,135

2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
$
63,709

 
$
73,150

 
$
2,434

 
$
9,696

 
$
6,797

 
$
5,631

 
$
161,417

Loans charged-off
(20,803
)
 
(17,997
)
 
70

 
(1,614
)
 
(2,854
)
 
(3,674
)
 
(46,872
)
Recoveries on loans previously charged-off
2,156

 
1,871

 
41

 
11

 
395

 
240

 
4,714

Net (charge-offs) recoveries
(18,647
)
 
(16,126
)
 
111

 
(1,603
)
 
(2,459
)
 
(3,434
)
 
(42,158
)
Provision (release) for loan losses
33,004

 
(9,050
)
 
769

 
72

 
848

 
611

 
26,254

Balance at end of period
$
78,066

 
$
47,974

 
$
3,314

 
$
8,165

 
$
5,186

 
$
2,808

 
$
145,513


Reserve for Unfunded Commitments (1) 
(Amounts in thousands)
 
 
Quarter Ended
 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
9,363

 
$
9,533

 
$
9,206

 
$
7,343

Provision (release) for unfunded commitments
481

 
(1,346
)
 
638

 
844

Balance at end of period
$
9,844

 
$
8,187

 
$
9,844

 
$
8,187

Unfunded commitments, excluding covered assets, at period end (1)
$
5,562,796

 
$
4,805,141

 
 
 
 
(1) 
Unfunded commitments include commitments to extend credit, standby letters of credit and commercial letters of credit. Unfunded commitments related to covered assets are excluded as they are covered under a loss sharing agreement with the FDIC.

Refer to Note 15 for additional details of commitments to extend credit, standby letters of credit and commercial letters of credit.

6. COVERED ASSETS

Covered assets represent acquired loans and foreclosed loan collateral covered under a loss sharing agreement with the FDIC and include an indemnification receivable representing the present value of the expected reimbursement from the FDIC related to expected losses on the acquired loans and foreclosed real estate under such agreement. The loss share agreement expired on September 30, 2014 for non-residential mortgage loans and related assets and will expire on September 30, 2019 for residential mortgage loans and related assets.


24

The carrying amount of covered assets is presented in the following table.

Covered Assets
(Amounts in thousands)
 
 
September 30, 2014
 
December 31, 2013
 
Purchased
Loans (1)
 
Other
Assets
 
Total
 
Purchased
Loans (1)
 
Other
Assets
 
Total
Commercial loans
$
3,057

 
$
—

 
$
3,057

 
$
11,562

 
$
—

 
$
11,562

Commercial real estate loans
24,097

 
—

 
24,097

 
46,657

 
—

 
46,657

Residential mortgage loans
33,058

 
—

 
33,058

 
36,883

 
—

 
36,883

Consumer installment and other
1,312

 
226

 
1,538

 
3,213

 
259

 
3,472

Foreclosed real estate
—

 
868

 
868

 
—

 
7,880

 
7,880

Estimated loss reimbursement by the FDIC
—

 
2,864

 
2,864

 
—

 
6,292

 
6,292

Total covered assets
61,524

 
3,958

 
65,482

 
98,315

 
14,431

 
112,746

Allowance for covered loan losses
(4,485
)
 
—

 
(4,485
)
 
(16,511
)
 
—

 
(16,511
)
Net covered assets
$
57,039

 
$
3,958

 
$
60,997

 
$
81,804

 
$
14,431

 
$
96,235

Nonperforming covered loans (2)
$
9,132

 
 
 
 
 
$
15,610

 
 
 
 
(1) 
Purchased loans include $967,000 and $7.6 million of purchased impaired loans as of September 30, 2014 and December 31, 2013, respectively.
(2) 
Excludes purchased impaired loans which are accounted for on a pool basis based on common risk characteristics as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Because we are recognizing interest income on each pool of loans, all purchased impaired loans are considered to be performing.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Carrying Amount of Goodwill by Operating Segment
(Amounts in thousands)
 
 
September 30,
2014
 
December 31, 2013
Banking
$
81,755

 
$
81,755

Asset management
12,286

 
12,286

Total goodwill
$
94,041

 
$
94,041


Goodwill is not amortized but, instead, is subject to impairment tests at least on an annual basis or more often if events or circumstances occur that would indicate it is more likely than not that the fair value of a reporting unit is below its carrying value. Our annual goodwill impairment test was performed as of October 31, 2013, and it was determined no impairment existed as of that date. A goodwill impairment charge of $146,000 was recorded in the fourth quarter 2013 in connection with the December 31, 2013 sale of Lodestar Investment Counsel, LLC ("Lodestar"), an investment management firm and previously a wholly-owned subsidiary of the Company. Our annual goodwill impairment test will be completed during fourth quarter 2014.

We are not aware of any events or circumstances that would indicate goodwill is impaired at September 30, 2014.

We have other intangible assets capitalized on the Consolidated Statements of Financial Condition in the form of core deposit premiums and client relationships. These intangible assets are being amortized over their estimated useful lives, which range from 8 to 12 years.

We review intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. During third quarter 2014, there were no events or circumstances that we believe indicate there may be impairment of intangible assets, and no impairment charges for other intangible assets were recorded for the nine months ended September 30, 2014.


25

Other Intangible Assets
(Amounts in thousands)

 
For the Nine Months Ended September 30, 2014
 
For the Year Ended December 31, 2013
Core deposit intangibles:
 
 
 
Gross carrying amount
$
18,093

 
$
18,093

Accumulated amortization
12,180

 
10,071

Net carrying amount
$
5,913

 
$
8,022

Amortization during the period
$
2,109

 
$
2,709

Weighted average remaining life (in years)
3

 
3

Client relationships:
 
 
 
Gross carrying amount
$
2,002

 
$
2,002

Accumulated amortization
1,288

 
1,132

Net carrying amount
$
714

 
$
870

Amortization during the period
$
156

 
$
412

Weighted average remaining life (in years)
6

 
7


Scheduled Amortization of Other Intangible Assets
(Amounts in thousands)
 
 
Total
Year ending December 31,
 
2014 - remaining three months
$
742

2015
2,455

2016
2,161

2017
1,125

2018
98

2019 and thereafter
46

Total
$
6,627



26

8. SHORT-TERM AND SECURED BORROWINGS

Summary of Short-Term Borrowings
(Dollars in thousands)

 
September 30, 2014
 
December 31, 2013
 
Amount
 
Rate
 
Amount
 
Rate
Outstanding:
 
 
 
 
 
 
 
FHLB advances
$
3,000

 
3.49
%
 
$
2,000

 
3.37
%
Other Information:
 
 
 
 
 
 
 
Weighted average remaining maturity of FHLB advances at period end
5 months

 
 
 
12 months

 
 
Unused FHLB advances availability
$
490,265

 
 
 
$
395,302

 
 
Unused overnight federal funds availability (1)
$
625,000

 
 
 
$
520,000

 
 
Borrowing capacity through the FRB discount window primary credit program (2)
$
460,156

 
 
 
$
621,855

 
 
(1) 
Our total availability of overnight fed fund borrowings is not a committed line of credit and is dependent upon lender availability.
(2) 
Our borrowing capacity changes each quarter subject to available collateral and FRB discount factors.

FHLB Advances - At September 30, 2014 the Bank had $3.0 million short-term and $7.0 million long-term advances outstanding from the FHLB Atlanta and $280.0 million in long-term advances outstanding with the FHLB Chicago. As a member of the FHLB Chicago, the Bank has access to borrowing capacity which is subject to change based on the availability of acceptable collateral to pledge and the level of our investment in FHLB Chicago stock. At September 30, 2014 our borrowing capacity was $770.6 million of which $490.3 million is available, subject to the additional investment in FHLB Chicago stock required. Qualifying residential, multi-family and commercial real estate loans, home equity lines of credit, and mortgage-backed securities are pledged as collateral to secure current outstanding balances and additional borrowing availability. FHLB advances reported as short-term borrowings represent advances with a remaining maturity of one year or less at September 30, 2014 and December 31, 2013.

Revolving Line of Credit - During the third quarter 2014, the Company amended its $60.0 million 364-day Revolving Line of Credit (the "Facility") with a group of commercial banks resulting in a new maturity date of September 25, 2015. Any amounts outstanding under the Facility upon maturity may be converted, at the Company's option, to an amortizing term loan, with the balance of such loan due September 26, 2017. Loans under the Facility bear interest, at the Company's election, either at a floating rate equal to LIBOR plus 1.95%, or a defined base rate minus 0.50%. At September 30, 2014, no amounts have been drawn on the Facility.

Secured Borrowings - Also included in short-term and secured borrowings on the Consolidated Statements of Financial Condition are amounts related to certain loan participation agreements on loans we originated that were classified as secured borrowings because they did not qualify for sale accounting treatment. As of September 30, 2014 and December 31, 2013, these loan participation agreements totaled $3.6 million and $6.4 million, respectively. A corresponding amount was recorded within loans on the Consolidated Statements of Financial Condition at each of these dates.


27

9. LONG-TERM DEBT

Long-Term Debt
(Dollars in thousands)
 
 
 
 
 
 
September 30,
2014
 
December 31,
2013
Parent Company:
 
 
 
 
 
 
 
2.88% junior subordinated debentures due 2034
(1)(a) 
 
$
8,248


$
8,248

1.94% junior subordinated debentures due 2035
(2)(a) 
 
51,547


51,547

1.73% junior subordinated debentures due 2035
(3)(a) 
 
41,238


41,238

10.00% junior subordinated debentures due 2068
(a) 
 
143,760


143,760

7.125% subordinated debentures due 2042
(b) 
 
 
 
125,000

 
125,000

Subtotal
 
 
 
 
369,793


369,793

Subsidiaries:
 
 
 
 




FHLB advances
 
 
 
 
287,000


258,000

Total long-term debt
 
 
 
 
$
656,793


$
627,793

(1) 
Variable rate in effect at September 30, 2014 based on three-month LIBOR +2.65%.
(2) 
Variable rate in effect at September 30, 2014, based on three-month LIBOR +1.71%.
(3) 
Variable rate in effect at September 30, 2014, based on three-month LIBOR +1.50%.
(a) 
Under the final regulatory capital rules issued in July 2013, these instruments are grandfathered for inclusion as a component of Tier 1 capital, although the Tier 1 capital treatment for these instruments will be subject to phase-out due to certain acquisitions.
(b) 
Qualifies as Tier 2 capital for regulatory capital purposes.

The $244.8 million in junior subordinated debentures reflected in the table above were issued to four separate wholly-owned trusts for the purpose of issuing Company-obligated mandatorily redeemable trust preferred securities. Refer to Note 10 for further information on the nature and terms of these securities.

On October 8, 2014, the Company redeemed $75.0 million of the $143.8 million outstanding 10.00% Junior Subordinated Debentures due 2068. Refer to Note 19 for further information on the redemption.

At September 30, 2014, outstanding long-term FHLB advances were secured by residential mortgage-backed securities and have fixed interest rates.

Maturity and Rate Schedule for FHLB Long-Term Advances
(Amounts in thousands)
 
 
September 30,
2014
 
December 31,
2013
 
Amount
 
Rate %
 
Amount
 
Rate %
Maturity Date:
 
 
 
 
 
 
 
June 24, 2015
$
—

 
—
%
 
$
1,000

 
3.71
%
December 21, 2015
2,000

 
4.22
%
 
2,000

 
4.22
%
December 31, 2015
250,000

 
0.09
%
 
250,000

 
0.09
%
March 25, 2019
2,000

 
4.26
%
 
2,000

 
4.26
%
May 22, 2019
3,000

 
4.68
%
 
3,000

 
4.68
%
September 12, 2019 (1)
15,000

 
3.72
%
 
—

 
—
%
September 26, 2019 (1)
15,000

 
3.69
%
 
—

 
—
%
Total
$
287,000

 
0.57
%
 
$
258,000

 
0.22
%
(1) 
Provides for a one-time option to increase the advances in September 2016, up to $150.0 million each at the same fixed rate as the original advance. The advances include prepayment features and are subject to a prepayment fee.

28

 
We reclassify long-term debt to short-term borrowings when the remaining maturity becomes less than one year.

Scheduled Maturities of Long-Term Debt
(Amounts in thousands)
 
 
Total
Year ending December 31,
 
2015
$
252,000

2019 and thereafter
404,793

Total
$
656,793


10. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES HELD BY TRUSTS THAT ISSUED GUARANTEED CAPITAL DEBT SECURITIES

As of September 30, 2014, we sponsored and wholly owned 100% of the common equity of four trusts that were formed for the purpose of issuing Company obligated mandatorily redeemable trust preferred securities ("Trust Preferred Securities") to third-party investors and investing the proceeds from the sale of the Trust Preferred Securities solely in a series of junior subordinated debentures of the Company ("Debentures"). The Debentures held by the trusts, which in aggregate total $244.8 million at September 30, 2014, are the sole assets of each respective trust. Our obligations under the Debentures and related documents, including the indentures, the declarations of trust and related Company guarantees, taken together, constitute a full and unconditional guarantee by the Company on a subordinated basis of distributions, redemption payments and liquidation payments on the Trust Preferred Securities. We currently have the right to redeem, in whole or in part, subject to any required regulatory approval, all or any series of the Debentures, in each case, at a redemption price of 100% of the principal amount of the Debentures being redeemed plus any accrued but unpaid interest to the redemption date. The repayment, redemption or repurchase of any of the Debentures would be subject to the terms of the applicable indenture and would result in a corresponding repayment, redemption or repurchase of an equivalent amount of the related series of Trust Preferred Securities. Any redemption of the Debentures held by the PrivateBancorp Capital Trust IV (the "Series IV Debentures") would be subject to the terms of the replacement capital covenant described below and any required regulatory approval.

In connection with the issuance in 2008 of the Series IV Debentures, which rank junior to the other Debentures, we entered into a replacement capital covenant that relates to redemption of the Series IV Debentures and the related Trust Preferred Securities. Under the replacement capital covenant, as amended in October 2012, we committed, for the benefit of certain debt holders, that we would not repay, redeem or repurchase the Series IV Debentures or the related Trust Preferred Securities prior to June 2048 unless we have (1) obtained any required regulatory approval, and (2) raised certain amounts of qualifying equity or equity-like replacement capital at any time after October 10, 2012. The replacement capital covenant benefits holders of our "covered debt" as specified under the terms of the replacement capital covenant. Currently, under the replacement capital covenant, the "covered debt" is the Debentures held by PrivateBancorp Statutory Trust II. In the event that the Company's 7.125% subordinated debentures due 2042 are designated as or become the covered debt under the replacement capital covenant, the terms of such debentures provide that the Company is authorized to terminate the replacement capital covenant without any further action or payment. We may amend or terminate the replacement capital covenant in certain circumstances without the consent of the holders of the covered debt.

On October 8, 2014, we redeemed $75.0 million of the $143.8 million outstanding 10.00% Junior Subordinated Debentures due 2068, and PrivateBancorp Capital Trust IV ("Capital Trust IV"), using the proceeds from the debenture redemption, redeemed a proportionate amount of its outstanding Trust Preferred Securities and common securities. Refer to Note 19 for further information on the redemption.

Under current accounting rules, the trusts qualify as variable interest entities for which we are not the primary beneficiary and therefore are ineligible for consolidation in our financial statements. The Debentures issued by us to the trusts are included in our Consolidated Statements of Financial Condition as "long-term debt" with the corresponding interest distributions recorded as interest expense. The common shares issued by the trusts are included in other assets in our Consolidated Statements of Financial Condition with the related dividend distributions recorded in other non-interest income.


29

Common Securities, Preferred Securities, and Related Debentures
(Dollars in thousands)
 
 
 
 
Common Securities Issued
 
Trust Preferred Securities
Issued (1)
 
 
 
Earliest Redemption Date (on or after) (3)
 
 
 
Principal Amount of
Debentures (3)
 
Issuance
Date
 
 
 
Coupon
Rate (2)
 
 
Maturity
 
September 30,
2014
 
December 31,
2013
Bloomfield Hills Statutory Trust I
May 2004
 
$
248

 
$
8,000

 
2.88
%
 
Jun 17, 2009
 
June 2034
 
$
8,248

 
$
8,248

PrivateBancorp Statutory Trust II
Jun. 2005
 
1,547

 
50,000

 
1.94
%
 
Sep 15, 2010
 
Sept. 2035
 
51,547

 
51,547

PrivateBancorp Statutory Trust III
Dec. 2005
 
1,238

 
40,000

 
1.73
%
 
Dec 15, 2010
 
Dec. 2035
 
41,238

 
41,238

PrivateBancorp Capital Trust IV
May 2008
 
10

 
143,750

 
10.00
%
 
Jun 15, 2013
 
June 2068
 
143,760

 
143,760

Total
 
 
$
3,043

 
$
241,750

 
 
 
 
 
 
 
$
244,793

 
$
244,793

(1) 
The trust preferred securities accrue distributions at a rate equal to the interest rate on and have a maturity identical to that of the related Debentures. The trust preferred securities will be redeemed upon maturity or earlier redemption of the related Debentures.
(2) 
Reflects the coupon rate in effect at September 30, 2014. The coupon rate for Bloomfield Hills Statutory Trust I is a variable rate and is based on three-month LIBOR plus 2.65%. The coupon rates for PrivateBancorp Statutory Trusts II and III are a variable rate based on three-month LIBOR plus 1.71% for Trust II and three-month LIBOR plus 1.50% for Trust III. The coupon rate for PrivateBancorp Capital Trust IV is fixed at 10.00%. Distributions on all of the trust preferred securities of each Trust are payable quarterly. We have the right to defer payment of interest on the Debentures at any time or from time to time for a period not exceeding ten years in the case of the Debentures held by Trust IV, and five years in the case of all other Debentures, without causing an event of default under the related indenture, provided no extension period may extend beyond the stated maturity of the Debentures. During such extension period, distributions on the trust preferred securities would also be deferred, and our ability to pay dividends on our common stock would generally be prohibited. The Federal Reserve has the ability to prevent interest payments on the Debentures.
(3) 
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the Debentures at maturity or upon their earlier redemption in whole or in part. The Debentures are redeemable in whole or in part prior to maturity at any time after the dates shown in the table and only after we have obtained Federal Reserve approval, if then required under applicable guidelines or regulations.


30

11. EQUITY

Comprehensive Income

Change in Accumulated Other Comprehensive Income ("AOCI") by Component
(Amounts in thousands)

 
Nine Months Ended September 30,
 
2014
 
2013
 
Unrealized Gain on Available-for-Sale Securities
 
Accumulated
Loss on Effective
Cash Flow
Hedges
 
Total
 
Unrealized Gain on Available-for-Sale Securities
 
Accumulated
Gain (Loss)on Effective
Cash Flow
Hedges
 
Total
Balance at beginning of period
$
12,960

 
$
(3,116
)
 
$
9,844

 
$
42,219

 
$
5,845

 
$
48,064

Increase in unrealized gains (losses) on securities
8,133

 
—

 
8,133

 
(37,596
)
 
—

 
(37,596
)
Increase in unrealized gains on cash flow hedges
—

 
9,710

 
9,710

 
—

 
(6,118
)
 
(6,118
)
Tax (expense) benefit on increase in unrealized gains (losses)
(3,216
)
 
(3,815
)
 
(7,031
)
 
14,623

 
2,381

 
17,004

Other comprehensive income (loss) before reclassifications
4,917

 
5,895

 
10,812

 
(22,973
)
 
(3,737
)
 
(26,710
)
Reclassification adjustment of net gains included in net income (1)
(530
)
 
(6,763
)
 
(7,293
)
 
(895
)
 
(4,110
)
 
(5,005
)
Reclassification adjustment for tax expense on realized net gains(2)
209

 
2,664

 
2,873

 
353

 
1,621

 
1,974

Amounts reclassified from AOCI
(321
)
 
(4,099
)
 
(4,420
)
 
(542
)
 
(2,489
)
 
(3,031
)
Net current period other comprehensive income (loss)
4,596

 
1,796

 
6,392

 
(23,515
)
 
(6,226
)
 
(29,741
)
Balance at end of period
$
17,556

 
$
(1,320
)
 
$
16,236

 
$
18,704

 
$
(381
)
 
$
18,323

(1) 
The amounts reclassified from AOCI for the available-for-sale securities are included in net securities gains on the Consolidated Statements of Income, while the amounts reclassified from AOCI for cash flow hedges are included in interest income on loans on the Consolidated Statements of Income.
(2) 
The tax expense amounts reclassified from AOCI in connection with the available-for-sale securities reclassification and cash flow hedges reclassification are included in income tax provision on the Consolidated Statements of Income.

Conversion of Nonvoting Common Stock

During the third quarter 2014, holders of 1.3 million shares of our nonvoting common stock converted such shares into an equal number of newly-issued shares of our voting common stock. The conversion was done in accordance with the terms of the non-voting common stock and in connection with the holders' sale of such newly-issued voting common stock.


31

12. EARNINGS PER COMMON SHARE

Basic and Diluted Earnings per Common Share
(Amounts in thousands, except per share data)

 
Quarter Ended
September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Basic earnings per common share
 
 
 
 
 
Net income
$
40,527

 
$
33,058

 
$
115,856

 
$
89,243

Net income allocated to participating stockholders (1)
(515
)
 
(655
)
 
(1,666
)
 
(1,772
)
Net income allocated to common stockholders
$
40,012

 
$
32,403

 
$
114,190

 
$
87,471

Weighted-average common shares outstanding
77,110

 
76,494

 
76,951

 
76,352

Basic earnings per common share
$
0.52

 
$
0.42

 
$
1.48

 
$
1.15

Diluted earnings per common share
 
 
 
 
 
 
 
Diluted earnings applicable to common stockholders (2)
$
40,017

 
$
32,406

 
$
114,206

 
$
87,475

Weighted-average diluted common shares outstanding:
 
 
 
 
 
 
 
Weighted-average common shares outstanding
77,110

 
76,494

 
76,951

 
76,352

Dilutive effect of stock awards (3)
824

 
325

 
770

 
185

Weighted-average diluted common shares outstanding
77,934

 
76,819

 
77,721

 
76,537

Diluted earnings per common share
$
0.51

 
$
0.42

 
$
1.47

 
$
1.14

(1) 
Participating stockholders are those that hold certain share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents. Such shares or units are considered participating securities (i.e., certain of the Company’s deferred and restricted stock units and nonvested restricted stock awards).
(2) 
Net income allocated to common stockholders for basic and diluted earnings per share may differ under the two-class method as a result of adding common stock equivalents for options to dilutive shares outstanding, which alters the ratio used to allocate net income to common stockholders and participating securities for the purposes of calculating diluted earnings per share.
(3) 
For the quarters ended September 30, 2014 and 2013, the weighted-average outstanding non-participating securities of 1.3 million and 2.9 million shares, respectively, and for the nine months ended September 30, 2014 and 2013, the weighted-average outstanding non-participating securities of 1.3 million and 3.1 million shares, respectively, were not included in the computation of diluted earnings per common share because their inclusion would have been antidilutive for the periods presented.

13. INCOME TAXES

Income Tax Provision Analysis
(Dollars in thousands)
 
 
Quarter Ended
September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Income before income taxes
$
65,701

 
$
54,219

 
$
188,050

 
$
145,050

Income tax provision:
 
 
 
 
 
 
 
Current income tax provision
$
31,406

 
$
21,297

 
$
77,359

 
$
42,636

Deferred income tax (benefit) provision
(6,232
)
 
(136
)
 
(5,165
)
 
13,171

Total income tax provision
$
25,174

 
$
21,161

 
$
72,194

 
$
55,807

Effective tax rate
38.3
%
 
39.0
%
 
38.4
%
 
38.5
%

Deferred Tax Assets

Net deferred tax assets totaled $98.3 million at September 30, 2014 and $98.6 million at December 31, 2013. Net deferred tax assets are included in other assets in the accompanying Consolidated Statements of Financial Condition.


32

At September 30, 2014, we have concluded that it is more likely than not that the deferred tax assets will be realized and no valuation allowance was recorded. This conclusion was based in part on our recent earnings history, on both a book and tax basis, and our outlook for earnings and taxable income in future periods.

As of September 30, 2014 and December 31, 2013, we had $212,000 and $347,000, respectively, of unrecognized tax benefits relating to uncertain tax positions that, if recognized, would impact the effective tax rate.

14. DERIVATIVE INSTRUMENTS

We utilize an overall risk management strategy that incorporates the use of derivative instruments to reduce both interest rate risk (relating to mortgage loan commitments and planned sales of loans) and foreign currency volatility (relating to certain loans denominated in currencies other than the U.S. dollar). We also use these instruments to accommodate our clients as we provide them with risk management solutions. None of the client-related and other end-user derivatives, noted in the table below, were designated as hedging instruments for accounting purposes at September 30, 2014 and December 31, 2013.

We also use interest rate derivatives to hedge variability in forecasted interest cash flows in our loan portfolio which is comprised primarily of floating-rate loans. These derivatives are designated as cash flow hedges.

Derivatives expose us to counterparty credit risk. Credit risk is managed through our standard underwriting process. Actual exposures are monitored against various types of credit limits established to contain risk within parameters. Additionally, credit risk is managed through the use of collateral, netting agreements, and the establishment of internal concentration limits by financial institution.

Notional Amounts and Fair Value of Derivative Instruments
(Amounts in thousands)
 
 
Asset Derivatives
 
Liability Derivatives
 
September 30, 2014
 
December 31, 2013
 
September 30, 2014
 
December 31, 2013
 
Notional (1)
 
Fair
Value
 
Notional (1)
 
Fair
Value
 
Notional (1)
 
Fair
Value
 
Notional (1)
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
400,000

 
$
2,973

 
$
350,000

 
$
4,005

 
$
375,000

 
$
5,846

 
$
325,000

 
$
9,748

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Client-related derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
3,578,189

 
$
37,807

 
$
3,959,328

 
$
54,155

 
$
3,578,189

 
$
38,474

 
$
3,959,328

 
$
54,930

Foreign exchange contracts
100,899

 
5,093

 
116,761

 
3,029

 
100,899

 
4,586

 
116,761

 
2,570

Credit contracts (1)
81,969

 
9

 
91,694

 
34

 
108,295

 
37

 
113,348

 
98

Total client-related derivatives
 
 
$
42,909

 
 
 
$
57,218

 
 
 
$
43,097

 
 
 
$
57,598

Other end-user derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
16,400

 
$
530

 
$
5,436

 
$
16

 
$
1,765

 
$
10

 
$
7,041

 
$
218

Mortgage banking derivatives
 
 
176

 
 
 
341

 
 
 
127

 
 
 
103

Total other end-user derivatives
 
 
$
706

 
 
 
$
357

 
 
 
$
137

 
 
 
$
321

Total derivatives not designated as hedging instruments
 
 
$
43,615

 
 
 
$
57,575

 
 
 
$
43,234

 
 
 
$
57,919

Netting adjustments (2)
 
 
(11,692
)
 
 
 
(13,158
)
 
 
 
(21,104
)
 
 
 
(18,777
)
Total derivatives
 
 
$
34,896

 
 
 
$
48,422

 
 
 
$
27,976

 
 
 
$
48,890

(1) 
The remaining average notional amounts are shown for credit contracts.
(2) 
Represents netting of derivative asset and liability balances, and related cash collateral, with the same counterparty subject to master netting agreements.

Master Netting Agreements

Certain of the Company's derivative contracts are subject to enforceable master netting agreements with derivative counterparties. Authoritative accounting guidance permits the netting of derivative receivables and payables when a legally enforceable master

33

netting agreement exists between the Company and a derivative counterparty. A master netting agreement is an agreement between two counterparties who have multiple derivative contracts with each other that provide for the net settlement of contracts through a single payment, in a single currency, in the event of default on or termination of any one contract. For those derivative contracts subject to enforceable master netting agreements, derivative assets and liabilities, and related cash collateral, with the same counterparty are reported on a net basis within derivative assets and derivative liabilities on the Consolidated Statements of Financial Condition.

Derivative contracts may require the Company to provide or receive cash or financial instrument collateral. Collateral associated with derivative assets and liabilities subject to enforceable master netting agreements with the same counterparty is posted on a net basis. The Company has pledged cash or financial collateral in accordance with each counterparty's collateral posting requirements for all of the Company's derivative assets and liabilities in a net liability position as of September 30, 2014. Certain collateral posting requirements are subject to posting thresholds and minimum transfer amounts, such that the Company is only required to post collateral once the posting threshold is met, and any adjustments to the amount of collateral posted must meet minimum transfer amounts.

As of September 30, 2014, $9.4 million of cash collateral pledged was netted with the related derivative liabilities and no cash collateral was received to net with the related derivative assets on the Consolidated Statements of Financial Condition. To the extent not netted against derivative fair values under a master netting agreement, the receivable for cash pledged is included in other short-term investments. There was no receivable for cash pledged at September 30, 2014. Any securities pledged to counterparties as financial instrument collateral remain on the Consolidated Statements of Financial Condition as long as the Company does not default.


34

The following table presents information about the Company's derivative assets and liabilities and the related collateral by derivative type (e.g., interest rate contracts). As the Company posts collateral with counterparties on the basis of its net position in all derivative contracts with a given counterparty, the information presented below aggregates the derivative contracts entered into with the same counterparty.

Offsetting of Derivative Assets and Liabilities
(Amounts in thousands)

 
Gross Amounts of Recognized Assets / Liabilities (1)
 
Gross Amounts Offset (2)
 
Net Amount Presented on the Statement of Financial Condition
 
Gross Amounts Not Offset on the Statement of Financial Condition (3)
 
Net Amount
 
 
 
 
Financial Instruments (4)
 
Cash Collateral
 
As of September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
40,780

 
$
(7,731
)
 
$
33,049

 
$
—

 
$
—

 
$
33,049

Foreign exchange contracts
4,330

 
(3,959
)
 
371

 
—

 
—

 
371

Credit contracts
9

 
(2
)
 
7

 
—

 
—

 
7

Total derivatives subject to a master netting agreement
45,119

 
(11,692
)
 
33,427

 
—

 
—

 
33,427

Total derivatives not subject to a master netting agreement
1,469

 
—

 
1,469

 
—

 
—

 
1,469

Total derivatives
$
46,588

 
$
(11,692
)
 
$
34,896

 
$
—

 
$
—

 
$
34,896

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
44,320

 
$
(19,360
)
 
$
24,960

 
$
(19,022
)
 
$
—

 
$
5,938

Foreign exchange contracts
3,128

 
(1,743
)
 
1,385

 
(1,055
)
 
—

 
330

Credit contracts
37

 
(1
)
 
36

 
(27
)
 
—

 
9

Total derivatives subject to a master netting agreement
47,485

 
(21,104
)
 
26,381

 
(20,104
)
 
—

 
6,277

Total derivatives not subject to a master netting agreement
1,595

 
—

 
1,595

 
—

 
—

 
1,595

Total derivatives
$
49,080

 
$
(21,104
)
 
$
27,976

 
$
(20,104
)
 
$
—

 
$
7,872

(1) 
All derivative contracts are over-the-counter contracts.
(2) 
Represents end-user, client-related and cash flow hedging derivative contracts and related cash collateral entered into with the same counterparty and subject to a master netting agreement.
(3) 
Collateralization is determined at the counterparty level. If overcollateralization exists, the amount shown is limited to the fair value of the derivative.
(4) 
Financial instruments are disclosed at fair value. Financial instrument collateral is allocated pro-rata amongst the derivative liabilities to which it relates.


35

Offsetting of Derivative Assets and Liabilities (Continued)
(Amounts in thousands)

 
Gross Amounts of Recognized Assets / Liabilities (1)
 
Gross Amounts Offset (2)
 
Net Amount Presented on the Statement of Financial Condition
 
Gross Amounts Not Offset on the Statement of Financial Condition (3)
 
Net Amount
 
 
 
 
Financial Instruments (4)
 
Cash Collateral
 
As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
58,160

 
$
(12,371
)
 
$
45,789

 
$
—

 
$
—

 
$
45,789

Foreign exchange contracts
1,298

 
(767
)
 
531

 
—

 
—

 
531

Credit contracts
34

 
(20
)
 
14

 
—

 
—

 
14

Total derivatives subject to a master netting agreement
59,492

 
(13,158
)
 
46,334

 
—

 
—

 
46,334

Total derivatives not subject to a master netting agreement
2,088

 
—

 
2,088

 
—

 
—

 
2,088

Total derivatives
$
61,580

 
$
(13,158
)
 
$
48,422

 
$
—

 
$
—

 
$
48,422

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
64,678

 
$
(17,990
)
 
$
46,688

 
$
(41,192
)
 
$
—

 
$
5,496

Foreign exchange contracts
2,462

 
(767
)
 
1,695

 
(1,495
)
 
—

 
200

Credit contracts
98

 
(20
)
 
78

 
(69
)
 
—

 
9

Total derivatives subject to a master netting agreement
67,238

 
(18,777
)
 
48,461

 
(42,756
)
 
—

 
5,705

Total derivatives not subject to a master netting agreement
429

 
—

 
429

 
—

 
—

 
429

Total derivatives
$
67,667

 
$
(18,777
)
 
$
48,890

 
$
(42,756
)
 
$
—

 
$
6,134

(1) 
All derivative contracts are over-the-counter contracts.
(2) 
Represents end-user, client-related and cash flow hedging derivative contracts entered into with the same counterparty and subject to a master netting agreement.
(3) 
Collateralization is determined at the counterparty level. If overcollateralization exists, the amount shown is limited to the fair value of the derivative.
(4) 
Financial instruments are disclosed at fair value. Financial instrument collateral is allocated pro-rata amongst the derivative liabilities to which it relates.

Certain of our derivative contracts contain embedded credit risk contingent features that if triggered either allow the derivative counterparty to terminate the derivative or require additional collateral. These contingent features are triggered if we do not meet specified financial performance indicators such as minimum capital ratios under the federal banking agencies’ guidelines. All such requirements were met at September 30, 2014 and December 31, 2013. Details on these derivative contracts are set forth in the following table.

Derivatives Subject to Credit Risk Contingency Features
(Amounts in thousands)
 
 
September 30,
2014
 
December 31,
2013
Fair value of derivatives with credit contingency features in a net liability position
$
15,298

 
$
28,152

Collateral posted for those transactions in a net liability position
$
18,451

 
$
30,272

If credit risk contingency features were triggered:
 
 
 
Additional collateral required to be posted to derivative counterparties
$
—

 
$
—

Outstanding derivative instruments that would be immediately settled
$
15,298

 
$
28,152



36

Derivatives Designated in Hedge Relationships

The objective of our hedging program is to use interest rate derivatives to manage our exposure to interest rate movements.

Cash Flow Hedges – Under our cash flow hedging program we enter into receive fixed/pay variable interest rate swaps to convert certain floating-rate commercial loans to fixed-rate to reduce the variability in forecasted interest cash flows due to market interest rate changes. We use regression analysis to assess the effectiveness of cash flow hedges at both the inception of the hedge relationship and on an ongoing basis. Ineffectiveness is generally measured as the amount by which the cumulative change in fair value of the hedging instrument exceeds the present value of the cumulative change in the expected cash flows of the hedged item. Measured ineffectiveness is recognized directly in other non-interest income in the Consolidated Statements of Income. During the nine months ended September 30, 2014, there were no gains or losses from cash flow hedge derivatives related to ineffectiveness that were reclassified to current earnings. The effective portion of the gains or losses on cash flow hedges are recorded, net of tax, in accumulated other comprehensive income ("AOCI") and are subsequently reclassified to interest income on loans in the period that the hedged interest cash flows affect earnings. As of September 30, 2014, the maximum length of time over which forecasted interest cash flows are hedged is six years. There are no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to our cash flow hedge strategy.

Change in Accumulated Other Comprehensive Income
Related to Interest Rate Swaps Designated as Cash Flow Hedge
(Amounts in thousands)
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
Pre-tax
 
After-tax
 
Pre-tax
 
After-tax
 
Pre-Tax
 
After-tax
 
Pre-Tax
 
After-tax
Accumulated unrealized gain (loss) at beginning of period
$
2,461

 
$
1,501

 
$
(3,782
)
 
$
(2,305
)
 
$
(5,110
)
 
$
(3,116
)
 
$
9,603

 
$
5,845

Amount of (loss) gain recognized in AOCI (effective portion)
(2,168
)
 
(1,333
)
 
4,823

 
2,933

 
9,710

 
5,895

 
(6,118
)
 
(3,737
)
Amount reclassified from AOCI to interest income on loans
(2,456
)
 
(1,488
)
 
(1,666
)
 
(1,009
)
 
(6,763
)
 
(4,099
)
 
(4,110
)
 
(2,489
)
Accumulated unrealized loss at end of period
$
(2,163
)
 
$
(1,320
)
 
$
(625
)
 
$
(381
)
 
$
(2,163
)
 
$
(1,320
)
 
$
(625
)
 
$
(381
)

As of September 30, 2014, $5.5 million in net deferred gains, net of tax, recorded in AOCI are expected to be reclassified into earnings during the next twelve months. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to September 30, 2014. During the nine months ended September 30, 2014, there were no gains or losses from cash flow hedge derivatives reclassified to current earnings because it became probable that the original forecasted transaction would not occur.

Derivatives Not Designated in Hedge Relationships

Other End-User Derivatives – We enter into derivatives that include commitments to fund residential mortgage loans to be sold into the secondary market and forward commitments for the future delivery of residential mortgage loans. It is our practice to enter into forward commitments for the future delivery of residential mortgage loans when we enter into customer interest rate lock commitments. This practice allows us to economically hedge the effect of changes in interest rates on our commitments to fund the loans as well as on our portfolio of mortgage loans held-for-sale. At September 30, 2014, the par value of our mortgage loans held-for-sale totaled $18.5 million, the notional value of our interest rate lock commitments totaled $59.5 million, and the notional value of our forward commitments for the future delivery of residential mortgage loans totaled $78.0 million.

We are also exposed at times to foreign exchange risk as a result of originating loans in which the principal and interest are settled in a currency other than U.S. dollars. As of September 30, 2014, our exposure was to the Euro, Canadian dollar, British pound and Danish Kroner on $17.2 million of loans. We manage this risk by using forward currency derivatives.

Client-Related Derivatives – We offer, through our capital markets group, over-the-counter interest rate and foreign exchange derivatives to our clients, including but not limited to, interest rate swaps, interest rate options (also referred to as caps, floors, collars, etc.), foreign exchange forwards and options, as well as cash products such as foreign exchange spot transactions. When

37

our clients enter into an interest rate or foreign exchange derivative transaction with us, we mitigate our exposure to market risk through the execution of off-setting positions with inter-bank dealer counterparties. Although the off-setting nature of transactions originated by our capital markets group limits our market risk exposure, they do expose us to other risks including counterparty credit, settlement, and operational risk.

To accommodate our loan clients, we occasionally enter into risk participation agreements ("RPA") with counterparty banks to either accept or transfer a portion of the credit risk related to their interest rate derivatives or transfer a portion of the credit risk related to our interest rate derivatives. This allows clients to execute an interest rate derivative with one bank while allowing for distribution of the credit risk among participating members. We have entered into written RPAs in which we accept a portion of the credit risk associated with an interest rate derivative of another bank's loan client in exchange for a fee. We manage this credit risk through our loan underwriting process, and when appropriate, the RPA is backed by collateral provided by the clients under their loan agreement.

The current payment/performance risk of written RPAs is assessed using internal risk ratings which range from 1 to 8 with the latter representing the highest credit risk. The risk rating is based on several factors including the financial condition of the RPA’s underlying derivative counterparty, present economic conditions, performance trends, leverage, and liquidity.

The maximum potential amount of future undiscounted payments that we could be required to make under our written RPAs assumes that the underlying derivative counterparty defaults and that the floating interest rate index of the underlying derivative remains at zero percent. In the event that we would have to pay out any amounts under our RPAs, we will seek to maximize the recovery of these amounts from assets that our clients pledged as collateral for the derivative and the related loan.

Risk Participation Agreements
(Dollars in thousands)
 
 
September 30,
2014
 
December 31,
2013
Fair value of written RPAs
$
37

 
$
98

Range of remaining terms to maturity (in years)
Less than 1 to 4

 
Less than 1 to 4

Range of assigned internal risk ratings
2 to 7

 
2 to 7

Maximum potential amount of future undiscounted payments
$
4,466

 
$
3,263

Percent of maximum potential amount of future undiscounted payments covered by proceeds from liquidation of pledged collateral
27
%
 
16
%

Gain (Loss) Recognized on Derivative Instruments
Not Designated in Hedging Relationship
(Amounts in thousands)
 
 
Quarter Ended
September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Gain on client-related derivatives recognized in capital markets products income:
 
 
 
 
 
 
 
Interest rate contracts
$
1,626

 
$
2,427

 
$
6,644

 
$
10,500

Foreign exchange contracts
1,577

 
1,531

 
5,376

 
4,501

Credit contracts
50

 
(37
)
 
322

 
7

Total client-related derivatives
3,253

 
3,921

 
12,342

 
15,008

Gain (loss) on end-user derivatives recognized in other income:
 
 
 
 
 
 
 
Foreign exchange derivatives
1,028

 
(634
)
 
776

 
302

Mortgage banking derivatives
127

 
—

 
(189
)
 
—

Total end-user derivatives
1,155

 
(634
)
 
587

 
302

Total derivatives not designated in hedging relationship
$
4,408

 
$
3,287

 
$
12,929

 
$
15,310



38

15. COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES

Credit Extension Commitments and Guarantees

In the normal course of business, we enter into a variety of financial instruments with off-balance sheet risk to meet the financing needs of our clients and to conduct lending activities. These instruments principally include commitments to extend credit, standby letters of credit, and commercial letters of credit. These instruments involve, to varying degrees, elements of credit and liquidity risk in excess of the amounts reflected in the Consolidated Statements of Financial Condition.

Contractual or Notional Amounts of Financial Instruments (1) 
(Amounts in thousands)
 
 
September 30,
2014
 
December 31,
2013
Commitments to extend credit:
 
 
 
Home equity lines
$
128,987

 
$
139,116

Residential 1-4 family construction
26,929

 
32,714

Commercial real estate, other construction, and land development
1,004,466

 
703,382

Commercial and industrial
3,780,526

 
3,609,443

All other commitments
251,676

 
222,337

Total commitments to extend credit
$
5,192,584

 
$
4,706,992

Letters of credit:
 
 
 
Financial standby
$
334,634

 
$
308,577

Performance standby
40,980

 
26,932

Commercial letters of credit
8,317

 
4,500

Total letters of credit
$
383,931

 
$
340,009

(1) 
Includes covered asset commitments of $13.7 million and $18.7 million as of September 30, 2014 and December 31, 2013, respectively.

Commitments to extend credit are agreements to lend funds to a client as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and variable interest rates tied to the prime rate or LIBOR and may require payment of a fee for the unused portion of the commitment or for the amounts issued but not drawn on letters of credit. All or a portion of commitments with an initial term extending beyond one year require regulatory capital support, while commitments of less than one year do not, although under newly issued regulatory capital rules, unfunded commitments of less than one year will require regulatory capital unless unconditionally cancellable. Since many of our commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements of the borrowers. As of September 30, 2014, we had a reserve for unfunded commitments of $9.8 million, which reflects our estimate of inherent losses associated with these commitment obligations. The balance of this reserve changes based on a number of factors including: the balance of outstanding commitments and our assessment of the likelihood of borrowers to utilize these commitments. The reserve is recorded in other liabilities in the Consolidated Statements of Financial Condition.

Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a client to a third party. Standby letters of credit include performance and financial guarantees for clients in connection with contracts between our clients and third parties. Standby letters of credit are agreements where we are obligated to make payment to a third party on behalf of a client in the event the client fails to meet their contractual obligations. 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 client and the third party. In most cases, the Company receives a fee for the amount of a letter of credit issued but not drawn upon.

In the event of a client’s nonperformance, our credit loss exposure is equal to the contractual amount of those commitments. We manage this credit risk in a similar manner to evaluating credit risk in extending loans to clients under our credit policies. We use the same credit policies in making credit commitments as for on-balance sheet instruments, mitigating exposure to credit loss through various collateral requirements, if deemed necessary. In the event of nonperformance by the clients, we have rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.

39

The maximum potential future payments guaranteed by us under standby letters of credit arrangements are equal to the contractual amount of the commitment. The unamortized fees associated with standby letters of credit, which are included in other liabilities in the Consolidated Statements of Financial Condition, totaled $2.2 million as of September 30, 2014. We amortize these amounts into income over the commitment period. As of September 30, 2014, standby letters of credit had a remaining weighted-average term of approximately 13 months, with remaining actual lives ranging from less than 1 year to 6 years.

Other Commitments

The Company has unfunded commitments to Community Reinvestment Act ("CRA") investments and other investment partnerships totaling $17.3 million at September 30, 2014. Of these commitments, $3.3 million related to legally-binding unfunded commitments for tax-credit investments and was included within other assets and other liabilities on the Consolidated Statements of Financial Condition.

Credit Card Settlement Guarantees

Our third-party corporate credit card vendor issues corporate purchase credit cards on behalf of our commercial clients. The corporate purchase credit cards are issued to employees of certain of our commercial clients at the client’s direction and used for payment of business-related expenses. In most circumstances, these cards will be underwritten by our third-party vendor. However, in certain circumstances, we may enter into a recourse agreement, which transfers the credit risk from the third-party vendor to us in the event that the client fails to meet its financial payment obligation. In these circumstances, a total maximum exposure amount is established for our corporate client. In addition to the obligations presented in the prior table, the maximum potential future payments guaranteed by us under this third-party settlement guarantee were $10.6 million at September 30, 2014.

We believe that the estimated amounts of maximum potential future payments are not representative of our actual potential loss given our insignificant historical losses from this third-party settlement guarantee program. As of September 30, 2014, we have no recorded contingent liability in the consolidated financial statements for this settlement guarantee program, and management believes that the probability of any loss under this arrangement is remote.

Mortgage Loans Sold with Recourse

Certain mortgage loans sold have limited recourse provisions. The losses for the nine months ended September 30, 2014 and 2013 arising from limited recourse provisions were not material. Based on this experience, the Company has not established any liability for potential future losses relating to mortgage loans sold in prior periods.

Legal Proceedings

In June 2013, we were served with a complaint naming the Bank as an additional defendant in a lawsuit pending in the Circuit Court of the 21st Judicial Circuit, Kankakee County, Illinois known as Maas vs. Marek et. al. The lawsuit, brought by the beneficiaries of two trusts for which the Bank is serving as the successor trustee, seeks reimbursement of penalties and interest assessed by the IRS due to the late payment of certain generation skipping taxes by the trusts, as well as certain related attorney fees and other damages. The other named defendants include legal and accounting professionals that provided services related to the matters involved. In January 2014, the Circuit Court denied the Bank’s motion to dismiss, and the matter is now in the discovery process. Although we are not able to predict the likelihood of an adverse outcome, we currently anticipate that ultimate resolution of this matter will not have a material adverse impact on our financial condition or results of operations.

As of September 30, 2014, there were various other legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. Management does not believe that the outcome of these proceedings will have, individually or in the aggregate, a material adverse effect on the Company’s results of operations, financial condition or cash flows.

16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

We measure, monitor, and disclose certain of our assets and liabilities on a fair value basis. Fair value is used on a recurring basis to account for securities available-for-sale, mortgage loans held-for-sale, derivative assets, derivative liabilities, and certain other assets and other liabilities. In addition, fair value is used on a nonrecurring basis to apply lower-of-cost-or-market accounting to foreclosed real estate and certain other loans held-for-sale, evaluate assets or liabilities for impairment, including collateral-dependent impaired loans, and for disclosure purposes. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, we use various valuation techniques and input assumptions when estimating fair value.


40

U.S. GAAP requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and establishes a fair value hierarchy that prioritizes the inputs used to measure fair value into three broad levels based on the reliability of the input assumptions. The hierarchy gives the highest priority to level 1 measurements and the lowest priority to level 3 measurements. The three levels of the fair value hierarchy are defined as follows:

•
Level 1 – Unadjusted quoted prices for identical assets or liabilities traded in active markets.
•
Level 2 – Observable inputs other than level 1 prices, such as quoted prices for similar instruments; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
•
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The categorization of where an asset or liability falls within the hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Valuation Methodology

We believe our valuation methods are appropriate and consistent with other market participants. However, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value. Additionally, the methods used may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.

The following describes the valuation methodologies we use for assets and liabilities measured at fair value, including the general classification of the assets and liabilities pursuant to the valuation hierarchy.

Securities Available-for-Sale – Securities available-for-sale include U.S. Treasury, U.S. Agency, collateralized mortgage obligations, residential mortgage-backed securities, state and municipal securities, and foreign sovereign debt. Substantially all available-for-sale securities are fixed-income instruments that are not quoted on an exchange, but may be traded in active markets. The fair value of these securities is based on quoted market prices obtained from external pricing services. The principal markets for our securities portfolio are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. U.S. Treasury securities have been classified in level 1 of the valuation hierarchy. All other remaining securities are classified in level 2 of the valuation hierarchy. On a quarterly basis, the Company uses a variety of methods to validate the overall reasonableness of the fair values obtained from external pricing services, including evaluating pricing service inputs and methodologies, using exception reports based on analytical criteria, comparing prices obtained to prices received from other pricing sources, and reviewing the reasonableness of prices based on the Company’s knowledge of market liquidity and other market-related conditions. While we may challenge valuation inputs used in determining prices obtained from external pricing services based on our validation procedures, we have not altered the fair values ultimately provided by the external pricing services.

Mortgage Loans Held-for-Sale – Mortgage loans held-for-sale represent residential mortgage loan originations intended to be sold in the secondary market. We have elected the fair value option for residential mortgage loans originated with the intention of selling to a third party. The election of the fair value option aligns the accounting for these loans with the related mortgage banking derivatives used to economically hedge them. These mortgage loans are measured at fair value as of each reporting date, with changes in fair value recognized through mortgage banking non-interest income. The fair value of mortgage loans held-for-sale is determined based on prices obtained for loans with similar characteristics from third party sources. On a quarterly basis, the Company validates the overall reasonableness of the fair values obtained from third party sources by comparing prices obtained to prices received from various other pricing sources, and reviewing the reasonableness of prices based on Company knowledge of market liquidity and other market-related conditions. Mortgage loans held-for-sale are classified in level 2 of the valuation hierarchy.

Collateral-Dependent Impaired Loans – We do not record loans held for investment at fair value on a recurring basis. However, periodically, we record nonrecurring adjustments to reduce the carrying value of certain impaired loans based on fair value measurement. This population of impaired loans includes those for which repayment of the loan is expected to be provided solely by the underlying collateral. We measure the fair value of collateral-dependent impaired loans based on the fair value of the collateral securing these loans less estimated selling costs. A majority of collateral-dependent impaired loans are secured by real estate with the fair value generally determined based upon appraisals performed by a certified or licensed appraiser using a combination of valuation techniques such as sales comparison, income capitalization and cost approach and include inputs such as absorption rates, capitalization rates and comparables. We also consider other factors or recent developments that could result in adjustments to the collateral value estimates indicated in the appraisals. When a collateral dependent loan is secured by non-

41

real estate collateral such as receivables, inventory, or equipment, the fair value is generally determined based upon appraisals, field exams, or receivable reports. The valuation techniques and inputs are reviewed internally by an asset based specialist for reasonableness of estimated liquidation costs, collectability probabilities, and other market data. Accordingly, fair value estimates for collateral-dependent impaired loans are classified in level 3 of the valuation hierarchy. The carrying value of all impaired loans and the related specific reserves are disclosed in Note 4.

At the time a collateral-dependent loan is initially determined to be impaired, we review the existing collateral appraisal. If the most recent appraisal is greater than one-year old, a new appraisal is obtained on the underlying collateral. The Company generally obtains "as is" appraisal values for use in the evaluation of collateral-dependent impaired loans. Appraisals for loans in excess of $500,000 are updated with new independent appraisals at least annually and are formally reviewed by our internal appraisal department. Additional diligence is also performed at the six-month interval between annual appraisals. If during the course of the six-month review period there is evidence supporting a meaningful decline in the value of the collateral, the appraised value is either internally adjusted downward or a new appraisal is required to support the value of the impaired loan. As part of our internal review process, we consider other factors or recent developments that could adjust the valuations indicated in the appraisals or internal reviews. The Company’s internal appraisal review process validates the reasonableness of appraisals in conjunction with analyzing sales and market data from an array of market sources.

Covered Asset OREO and OREO – Covered asset OREO and OREO generated from our originated book of business are valued on a nonrecurring basis using third-party appraisals of each property and our judgment of other relevant market conditions and are classified in level 3 of the valuation hierarchy. As part of our internal review process, we consider other factors or recent developments that could adjust the valuations indicated in the appraisals or internal reviews. Updated appraisals on both OREO portfolios are typically obtained every twelve months and evaluated internally at least every six months. In addition, both property-specific and market-specific factors as well as collateral type factors are taken into consideration, which may result in obtaining more frequent appraisal updates or internal assessments. Appraisals are conducted by third-party independent appraisers under internal direction and engagement using a combination of valuation techniques such as sales comparison, income capitalization and cost approach and include inputs such as absorption rates, capitalization rate and comparables. Any appraisal with a value in excess of $250,000 is subject to a compliance review. Appraisals received with a value in excess of $1.0 million are subject to a technical review. Appraisals are either reviewed internally by our appraisal department or sent to an outside technical firm if appropriate. Both levels of review involve a scope appropriate for the complexity and risk associated with the OREO. To validate the reasonableness of the appraisals obtained, the Company compares the appraised value to the actual sales price of properties sold and analyzes the reasons why a property may be sold for less than its appraised value.

Derivative Assets and Derivative Liabilities – Derivative instruments with positive fair values are reported as an asset and derivative instruments with negative fair value are reported as liabilities, in both cases after taking into account the effects of master netting agreements. For derivative counterparties with which we have a master netting agreement, we measure nonperformance risk on the basis of our net exposure to the counterparty. The fair value of derivative assets and liabilities is determined based on prices obtained from third party advisors using standardized industry models. Many factors affect derivative values, including the level of interest rates, the market’s perception of our nonperformance risk as reflected in our credit spread, and our assessment of counterparty nonperformance risk. The nonperformance risk assessment is based on our evaluation of credit risk, or if available, on observable external assessments of credit risk. Values of derivative assets and liabilities are primarily based on observable inputs and are classified in level 2 of the valuation hierarchy, with the exception of certain client-related derivatives and risk participation agreements, as discussed below. On a quarterly basis, the Company uses a variety of methods to validate the overall reasonableness of the fair values obtained from third party advisors, including evaluating inputs and methodologies used by the third party advisors, comparing prices obtained to prices received from other pricing sources, and reviewing the reasonableness of prices based on the Company's knowledge of market liquidity and other market-related conditions. While we may challenge valuation inputs used in determining prices obtained from third party advisors based on our validation procedures, during the quarters ended September 30, 2014 and 2013, we did not alter the fair values ultimately provided by the third party advisors.

Level 3 derivatives include risk participation agreements and derivatives associated with clients whose loans are risk rated 6 or higher ("watch list derivative"). Refer to "Credit Quality Indicators" in Note 4 for further discussion on risk ratings. For these level 3 derivatives, the Company obtains prices from third party advisors, consistent with the valuation processes employed for the Company’s derivatives classified in level 2 of the fair value hierarchy, and then applies loss factors to adjust the prices obtained from third party advisors. The significant unobservable inputs that are employed in the valuation process for the risk participation agreements and watch list derivatives that cause these derivatives to be classified in level 3 of the fair value hierarchy are the historic loss factors specific to the particular industry segment and risk rating category. The loss factors are updated quarterly and are derived and aligned with the loss factors utilized in the calculation of the Company’s general reserve component of the allowance for loan losses. Changes in the fair value measurement of risk participation agreements and watch list derivatives are largely due to changes in the fair value of the derivative, risk rating adjustments and fluctuations in the pertinent historic average loss rate.


42

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the hierarchy level and fair value for each major category of assets and liabilities measured at fair value at September 30, 2014 and December 31, 2013 on a recurring basis.

Fair Value Measurements on a Recurring Basis
(Amounts in thousands)
 
 
September 30, 2014
 
December 31, 2013
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available-for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
168,352

 
$
—

 
$
—

 
$
168,352

 
$
142,575

 
$
—

 
$
—

 
$
142,575

U.S. Agency
—

 
45,935

 
—

 
45,935

 
—

 
45,528

 
—

 
45,528

Collateralized mortgage obligations
—

 
148,228

 
—

 
148,228

 
—

 
176,116

 
—

 
176,116

Residential mortgage-backed securities
—

 
859,438

 
—

 
859,438

 
—

 
963,107

 
—

 
963,107

State and municipal securities
—

 
319,301

 
—

 
319,301

 
—

 
274,650

 
—

 
274,650

Foreign sovereign debt
—

 
500

 
—

 
500

 
—

 
500

 
—

 
500

Total securities available-for-sale
168,352

 
1,373,402

 
—

 
1,541,754

 
142,575

 
1,459,901

 
—

 
1,602,476

Mortgage loans held-for-sale
—

 
18,402

 
—

 
18,402

 
—

 
17,619

 
—

 
17,619

Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contract derivatives designated as hedging instruments
—

 
2,973

 
—

 
2,973

 
—

 
4,005

 
—

 
4,005

Client-related derivatives
—

 
41,131

 
1,778

 
42,909

 
—

 
56,770

 
448

 
57,218

Other end-user derivatives
—

 
706

 
—

 
706

 
—

 
357

 
—

 
357

Netting adjustments
—

 
(10,926
)
 
(766
)
 
(11,692
)
 
—

 
(13,138
)
 
(20
)
 
(13,158
)
Total derivative assets
—

 
33,884

 
1,012

 
34,896

 
—

 
47,994

 
428

 
48,422

Total assets
$
168,352

 
$
1,425,688

 
$
1,012

 
$
1,595,052

 
$
142,575

 
$
1,525,514

 
$
428

 
$
1,668,517

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contract derivatives designated as hedging instruments
$
—

 
$
5,846

 
$
—

 
$
5,846

 
$
—

 
$
9,748

 
$
—

 
$
9,748

Client-related derivatives
—

 
42,296

 
801

 
43,097

 
—

 
57,500

 
98

 
57,598

Other end-user derivatives
—

 
137

 
—

 
137

 
—

 
321

 
—

 
321

Netting adjustments
—

 
(20,338
)
 
(766
)
 
(21,104
)
 
—

 
(18,757
)
 
(20
)
 
(18,777
)
Total derivative liabilities
$
—

 
$
27,941

 
$
35

 
$
27,976

 
$
—

 
$
48,812

 
$
78

 
$
48,890


If a change in valuation techniques or input assumptions for an asset or liability occurred between periods, we would consider whether this would result in a transfer between the three levels of the fair value hierarchy. There have been no transfers of assets or liabilities between level 1 and level 2 of the valuation hierarchy between December 31, 2013 and September 30, 2014.

There have been no other changes in the valuation techniques we used for assets and liabilities measured at fair value on a recurring basis from December 31, 2013 to September 30, 2014.

43

Reconciliation of Beginning and Ending Fair Value for Those
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (1) 
(Amounts in thousands)
 
 
Quarter Ended September 30,
 
2014
 
2013
 
Derivative
Assets
 
Derivative
(Liabilities)
 
Derivative
Assets
 
Derivative
(Liabilities)
Balance at beginning of period
$
2,527

 
$
(1,211
)
 
$
627

 
$
(87
)
Total gains:
 
 
 
 
 
 
 
Included in earnings (2)
23

 
122

 
56

 
6

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
Issuances
—

 
—

 
—

 
(32
)
Settlements
(510
)
 
91

 
(249
)
 
—

Transfers into Level 3 (out of Level 2) (3)
56

 
—

 
33

 
—

Transfers out of Level 3 (into Level 2) (3)
(318
)
 
197

 
—

 
—

Balance at end of period
$
1,778

 
$
(801
)
 
$
467

 
$
(113
)
Change in unrealized gains in earnings relating to assets and liabilities still held at end of period
$
20

 
$
121

 
$
56

 
$
6

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2014
 
2013
 
Derivative
Assets
 
Derivative
(Liabilities)
 
Derivative
Assets
 
Derivative
(Liabilities)
Balance at beginning of period
$
448

 
$
(98
)
 
$
1,023

 
$
(60
)
Total gains (losses):
 
 
 
 
 
 
 
Included in earnings (2)
188

 
726

 
92

 
(2
)
Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
Issuances
—

 
—

 
—

 
(51
)
Settlements
(1,063
)
 
(232
)
 
(688
)
 
—

Transfers into Level 3 (out of Level 2) (3)
2,635

 
(1,394
)
 
475

 
—

Transfers out of Level 3 (into Level 2) (3)
(430
)
 
197

 
(435
)
 
—

Balance at end of period
$
1,778

 
$
(801
)
 
$
467

 
$
(113
)
Change in unrealized gains (losses) in earnings relating to assets and liabilities still held at end of period
$
117

 
$
949

 
$
17

 
$
(3
)
(1) 
Fair value is presented prior to giving effect to netting adjustments.
(2) 
Amounts disclosed in this line are included in the Consolidated Statements of Income as capital markets products income for derivatives.
(3) 
Transfers in and transfers out are recognized at the end of each quarterly reporting period. In general, derivative assets and liabilities are transferred into Level 3 from Level 2 due to a lack of observable market data, as there was deterioration in the credit risk of the derivative counterparty. Conversely, derivative assets and liabilities are transferred out of Level 3 into Level 2 due to an improvement in the credit risk of the derivative counterparty.


44

Financial Instruments Recorded Using the Fair Value Option

Difference Between Aggregate Fair Value and Aggregate Remaining Principal Balance
for Mortgage Loans Held-For-Sale Elected to be Carried at Fair Value (1) 
(Amounts in thousands)
 
 
September 30,
2014
 
December 31,
2013
Aggregate fair value
$
18,402

 
$
17,619

Difference (1)
49

 
238

Aggregate unpaid principal balance
$
18,451

 
$
17,857

(1) 
The change in fair value is reflected in mortgage banking non-interest income.

As of September 30, 2014, none of the mortgage loans held-for-sale were on nonaccrual or 90 days or more past due and still accruing interest. Changes in fair value due to instrument-specific credit risk for the nine months ended September 30, 2014 were not material.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

From time to time, we may be required to measure certain other financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower-of-cost-or-fair-value accounting or write-downs of individual assets when there is evidence of impairment.

The following table provides the fair value of those assets that were subject to fair value adjustments during the third quarter 2014 and 2013, and still held at September 30, 2014 and 2013, respectively. All fair value measurements on a nonrecurring basis were measured using level 3 of the valuation hierarchy.

Fair Value Measurements on a Nonrecurring Basis
(Amounts in thousands)
 
 
Fair Value
 
Net Losses
 
September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Collateral-dependent impaired loans (1)
$
36,048

 
$
59,114

 
$
12,708

 
$
6,824

Covered assets - OREO (2) (3)
868

 
4,324

 
63

 
429

OREO (2)
11,704

 
25,549

 
4,750

 
12,328

Total
$
48,620

 
$
88,987

 
$
17,521

 
$
19,581

(1) 
Represents the fair value of loans adjusted to the appraised value of the collateral with a write-down in fair value or change in specific reserves during the respective period. These fair value adjustments are recorded against the allowance for loan losses.
(2) 
Represents the fair value of foreclosed properties that were adjusted subsequent to their initial classification as foreclosed assets. Write-downs are recognized as a component of net foreclosed real estate expense in the Consolidated Statements of Income.
(3) 
The 20% portion of any covered asset OREO write-down not reimbursed by the FDIC is recorded as net foreclosed real estate expense.

There have been no changes in the valuation techniques we used for assets and liabilities measured at fair value on a nonrecurring basis from December 31, 2013 to September 30, 2014.


45

Additional Information Regarding Level 3 Fair Value Measurements

The following table presents information regarding the unobservable inputs developed by the Company for its level 3 fair value measurements.

Quantitative Information Regarding Level 3 Fair Value Measurements
(Dollars in thousands)
 
Financial Instrument:
 
Fair Value
of Assets /
(Liabilities) at
September 30, 2014
 
Valuation Technique(s)
 
Unobservable
Input
 
Range
 
Weighted
Average
 
Watch list derivatives
 
$
1,005

 
Discounted cash flow
 
Loss factors
 
6.8% to 15.9%
 
15.9
 %
 
Risk participation agreements
 
$
(29
)
(1) 
Discounted cash flow
 
Loss factors
 
0.9% to 15.9%
 
11.6
 %
 
Collateral-dependent impaired loans
 
$
36,048

 
Sales comparison,
income capitalization
and/or cost approach
 
Property specific
adjustment
 
-1.2% to -30.8%
 
-22.4
 %
(2)  
OREO
 
$
11,704

 
Sales comparison,
income capitalization
and/or cost approach
 
Property specific
adjustment
 
-0.1% to -100.0%
 
-24.1
 %
(2)  
(1) 
Represents fair value of underlying swap.
(2) 
Weighted average is calculated based on assets with a property specific adjustment.

The significant unobservable inputs used in the fair value measurement of the risk participation agreements and watch list derivatives are the historic loss factors. A significant increase (decrease) in the pertinent loss factor would result in a significantly lower (higher) fair value measurement.

Estimated Fair Value of Certain Financial Instruments

U.S. GAAP requires disclosure of the estimated fair values of certain financial instruments, both assets and liabilities, on and off-balance sheet, for which it is practical to estimate the fair value. Because the disclosure of estimated fair values provided herein excludes the fair value of certain other financial instruments and all non-financial instruments, any aggregation of the estimated fair value amounts presented would not represent total underlying value. Examples of non-financial instruments having value not disclosed herein include the future earnings potential of significant customer relationships and the value of our asset management operations and other fee-generating businesses. In addition, other significant assets including property, plant, and equipment and goodwill are not considered financial instruments and, therefore, have not been included in the disclosure.

Various methodologies and assumptions have been utilized in management’s determination of the estimated fair value of our financial instruments, which are detailed below. The fair value estimates are made at a discrete point in time based on relevant market information. Because no market exists for a significant portion of these financial instruments, fair value estimates are based on judgments regarding future expected economic conditions, loss experience, and risk characteristics of the financial instruments. These estimates are subjective, involve uncertainties, and cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

In addition to the valuation methodology explained above for financial instruments recorded at fair value, the following methods and assumptions were used in estimating the fair value of financial instruments that are carried at cost in the Consolidated Statements of Financial Condition and includes the general classification of the assets and liabilities pursuant to the valuation hierarchy.

Short-term financial assets and liabilities – For financial instruments with a shorter-term or with no stated maturity, prevailing market rates, and limited credit risk, the carrying amounts approximate fair value. Those financial instruments include cash and due from banks, federal funds sold and interest-bearing deposits in banks (including the receivable for cash collateral pledged), accrued interest receivable, and accrued interest payable. Accrued interest receivable and accrued interest payable are classified consistent with the hierarchy of their corresponding assets and liabilities.


46

Other loans held-for-sale - Loans held-for-sale at September 30, 2014 are $39.3 million of loans held-for-sale in connection with the pending sale of the Company's Norcross, Georgia branch office. These loans held-for-sale are recorded at the lower of cost or fair value. Fair value estimates are based on the actual agreed upon price in the agreement.

Securities held-to-maturity – Securities held-to-maturity include collateralized mortgage obligations, residential mortgage-backed securities, agency commercial mortgage-backed securities and state and municipal securities. Substantially all held-to-maturity securities are fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair value of these securities is based on quoted market prices obtained from external pricing services. The principal markets for our securities portfolio are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets.

FHLB stock – The carrying value of FHLB stock approximates fair value as the stock is non-marketable, but can only be sold to the FHLB or another member institution at par.

Loans – The fair value of loans is calculated by discounting estimated cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. Cash flows are estimated by applying contractual payment terms to assumed interest rates. The estimate of maturity is based on contractual terms and includes assumptions that reflect our and the industry’s historical experience with repayments for each loan classification. The estimation is modified, as required, by the effect of current economic and lending conditions, collateral, and other factors.

Covered assets – Covered assets include acquired loans and foreclosed loan collateral covered under a loss sharing agreement with the FDIC (including the fair value of expected reimbursements from the FDIC). The fair value of covered assets is calculated by discounting contractual cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the asset. The estimate of maturity is based on contractual terms and includes assumptions that reflect our and the industry’s historical experience with repayments for each asset classification. The estimate is modified, as required, by the effect of current economic and lending conditions, collateral, and other factors.

Investment in BOLI – The cash surrender value of our investment in bank owned life insurance approximates the fair value.

Deposit liabilities – The fair values disclosed for noninterest-bearing deposits, savings deposits, interest-bearing demand deposits, and money market deposits are approximately equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair values for certificate of deposits and brokered time deposits were estimated using present value techniques by discounting the future cash flows at rates based on internal models and broker quotes.

Deposits held-for-sale – Deposits held-for-sale are recorded at the lower of cost or fair value. Amounts held at September 30, 2014 are deposits held-for-sale in connection with the pending sale of the Company's branch office located in Norcross, Georgia. Fair value estimates are based on the actual agreed upon price and premium in the agreement.

Short-term and other borrowings – The fair value of FHLB advances with remaining maturities of one year or less is estimated by discounting the obligations using the rates currently offered for borrowings of similar remaining maturities. The fair value of secured borrowings is equal to the value of the loans they are collateralizing. See "Loans" above for further information. The carrying amount of the obligation for cash collateral held is considered to be its fair value because of its short-term nature.

Long-term debt – The fair value of the Company's fixed-rate long-term debt was estimated using the unadjusted publicly-available market price as of period end.

FHLB advances with remaining maturities greater than one year and the Company's variable-rate junior subordinated debentures are estimated by discounting future cash flows. For the FHLB advances with remaining maturities greater than one year, the Company discounts cash flows using quoted interest rates for similar financial instruments. For the Company's variable-rate junior subordinated debentures, we interpolate a discount rate we believe is appropriate based on quoted interest rates and entity specific adjustments.

Commitments – Given the limited interest rate risk posed by the commitments outstanding at period end due to their variable rate structure, termination clauses provided in the agreements, and the market rate of fees charged, we have deemed the fair value of commitments outstanding to be immaterial.


47

Financial Instruments
(Amounts in thousands)
 
 
As of September 30, 2014
 
Carrying Amount
 
 
 
Fair Value Measurements Using
 
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
181,248

 
$
181,248

 
$
181,248

 
$
—

 
$
—

Federal funds sold and interest-bearing deposits in banks
416,071

 
416,071

 
—

 
416,071

 
—

Loans held-for-sale
57,748

 
57,748

 
—

 
57,748

 
—

Securities available-for-sale
1,541,754

 
1,541,754

 
168,352

 
1,373,402

 
—

Securities held-to-maturity
1,072,002

 
1,063,450

 
—

 
1,063,450

 
—

FHLB stock
28,666

 
28,666

 
—

 
28,666

 
—

Loans, net of allowance for loan losses and unearned fees
11,397,452

 
11,384,374

 
—

 
—

 
11,384,374

Covered assets, net of allowance for covered loan losses
60,997

 
65,670

 
—

 
—

 
65,670

Accrued interest receivable
39,701

 
39,701

 
—

 
—

 
39,701

Investment in BOLI
54,849

 
54,849

 
—

 
—

 
54,849

Derivative assets
34,896

 
34,896

 
—

 
33,884

 
1,012

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
12,849,204

 
$
12,854,519

 
$
—

 
$
10,145,156

 
$
2,709,363

Deposits held-for-sale
128,508

 
123,625

 
—

 
123,625

 
—

Short-term and other borrowings
6,563

 
5,607

 
—

 
3,041

 
2,566

Long-term debt
656,793

 
645,934

 
282,136

 
288,152

 
75,646

Accrued interest payable
6,987

 
6,987

 
—

 
—

 
6,987

Derivative liabilities
27,976

 
27,976

 
—

 
27,941

 
35



48

Financial Instruments (Continued)
(Amounts in thousands)

 
As of December 31, 2013
 
Carrying Amount
 
 
 
Fair Value Measurements Using
 
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
Cash and due from banks
$
133,518

 
$
133,518

 
$
133,518

 
$
—

 
$
—

Federal funds sold and interest-bearing deposits in banks
306,544

 
306,544

 
—

 
306,544

 
—

Loans held-for-sale
26,816

 
26,816

 
—

 
26,816

 
—

Securities available-for-sale
1,602,476

 
1,602,476

 
142,575

 
1,459,901

 
—

Securities held-to-maturity
921,436

 
896,908

 
—

 
896,908

 
—

FHLB stock
30,005

 
30,005

 
—

 
30,005

 
—

Loans, net of allowance for loan losses and unearned fees
10,500,912

 
10,484,250

 
—

 
—

 
10,484,250

Covered assets, net of allowance for covered loan losses
96,235

 
113,593

 
—

 
—

 
113,593

Accrued interest receivable
37,004

 
37,004

 
—

 
—

 
37,004

Investment in BOLI
53,865

 
53,865

 
—

 
—

 
53,865

Derivative assets
48,422

 
48,422

 
—

 
47,994

 
428

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
12,013,641

 
$
12,024,079

 
$
—

 
$
9,443,094

 
$
2,580,985

Short-term borrowings
8,400

 
8,513

 
—

 
2,060

 
6,453

Long-term debt
627,793

 
598,260

 
267,360

 
256,825

 
74,075

Accrued interest payable
6,326

 
6,326

 
—

 
—

 
6,326

Derivative liabilities
48,890

 
48,890

 
—

 
48,812

 
78


17. OPERATING SEGMENTS

We have three primary operating segments: Banking, Asset Management (formerly named Trust and Investments) and the Holding Company. With respect to the Banking and Asset Management segments, each is delineated by the products and services that each segment offers. The Banking operating segment is comprised of commercial and personal banking services, including mortgage originations. Commercial banking services are primarily provided to corporations and other business clients and include a wide array of lending and cash management products. Personal banking services offered to individuals, professionals, and entrepreneurs include direct lending and depository services. The Asset Management segment includes certain activities of our PrivateWealth group, including investment management, personal trust and estate administration, custodial and escrow, retirement plans and brokerage services. The activities of the third operating segment, the Holding Company, include the direct and indirect ownership of our banking subsidiary, the issuance of debt and intersegment eliminations.

The accounting policies of the individual operating segments are the same as those of the Company as described in Note 1, "Summary of Significant Accounting Policies," to the Notes to Consolidated Financial Statements of our 2013 Annual Report on Form 10-K. Transactions between operating segments are primarily conducted at fair value, resulting in profits that are eliminated from consolidated results of operations.


49

Financial results for each segment are presented below. For segment reporting purposes, the statement of financial condition of Asset Management is included with the Banking segment.

Operating Segments Performance
(Amounts in thousands)
 
 
Quarter Ended September 30,
 
Banking
 
Asset Management
 
Holding Company
and Other
Adjustments
 
Consolidated
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Net interest income (loss)
$
123,208

 
$
112,197

 
$
781

 
$
819

 
$
(7,231
)
 
$
(7,181
)
 
$
116,758

 
$
105,835

Provision for loan and covered loan losses
3,890

 
8,120

 
—

 
—

 
—

 
—

 
3,890

 
8,120

Non-interest income
26,414

 
23,187

 
4,240

 
4,570

 
15

 
16

 
30,669

 
27,773

Non-interest expense
71,194

 
63,784

 
4,108

 
4,300

 
2,534

 
3,185

 
77,836

 
71,269

Income (loss) before taxes
74,538

 
63,480

 
913

 
1,089

 
(9,750
)
 
(10,350
)
 
65,701

 
54,219

Income tax provision (benefit)
28,432

 
24,556

 
359

 
430

 
(3,617
)
 
(3,825
)
 
25,174

 
21,161

Net income (loss)
$
46,106

 
$
38,924

 
$
554

 
$
659

 
$
(6,133
)
 
$
(6,525
)
 
$
40,527

 
$
33,058

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
Banking
 
Asset Management
 
Holding Company
and Other
Adjustments
 
Consolidated
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Net interest income (loss)
$
357,115

 
$
331,687

 
$
2,555

 
$
2,423

 
$
(21,809
)
 
$
(21,503
)
 
$
337,861

 
$
312,607

Provision for loan and covered loan losses
7,924

 
27,320

 
—

 
—

 
—

 
—

 
7,924

 
27,320

Non-interest income
74,090

 
73,243

 
13,029

 
13,764

 
45

 
243

 
87,164

 
87,250

Non-interest expense
208,374

 
204,124

 
12,516

 
13,340

 
8,161

 
10,023

 
229,051

 
227,487

Income (loss) before taxes
214,907

 
173,486

 
3,068

 
2,847

 
(29,925
)
 
(31,283
)
 
188,050

 
145,050

Income tax provision (benefit)
82,415

 
66,787

 
1,208

 
1,123

 
(11,429
)
 
(12,103
)
 
72,194

 
55,807

Net income (loss)
$
132,492

 
$
106,699

 
$
1,860

 
$
1,724

 
$
(18,496
)
 
$
(19,180
)
 
$
115,856

 
$
89,243


 
Banking
 
Holding Company and Other Adjustments(1)
 
Consolidated
Selected Balances
9/30/2014
 
12/31/2013
 
9/30/2014
 
12/31/2013
 
9/30/2014
 
12/31/2013
Assets
$
13,469,613

 
$
12,465,063

 
$
1,720,855

 
$
1,620,683

 
$
15,190,468

 
$
14,085,746

Total loans
11,547,587

 
10,644,021

 
—

 
—

 
11,547,587

 
10,644,021

Deposits, excluding deposits held-for-sale
12,938,339

 
12,069,583

 
(89,135
)
 
(55,942
)
 
12,849,204

 
12,013,641

(1) 
Deposit amounts represent the elimination of Holding Company cash accounts included in total deposits of the Banking segment.


50

18. VARIABLE INTEREST ENTITIES

At September 30, 2014 and December 31, 2013, the Company had no variable interest entity ("VIE") consolidated in its financial statements. The table below highlights our interests in VIEs that are not consolidated in our financial statements.

Nonconsolidated VIEs
(Amounts in thousands)
 
 
September 30, 2014
 
December 31, 2013
 
Carrying
Amount
 
Maximum
Exposure
to Loss
 
Carrying
Amount
 
Maximum
Exposure
to Loss
Trust preferred capital securities issuances
$
244,793

 
$
—

 
$
244,793

 
$
—

Community reinvestment investments
8,556

 
10,481

 
7,889

 
9,813

TDR loans to commercial clients (1)
45,982

 
59,109

 
43,481

 
48,975

Total
$
299,331

 
$
69,590

 
$
296,163

 
$
58,788

(1) 
Excludes personal loans and loans to non-for-profit entities.

Trust preferred capital securities issuances – As discussed in Note 10, we sponsor and wholly own 100% of the common equity of four trusts that were formed for the purpose of issuing trust preferred securities to third-party investors and investing the proceeds from the sale of the trust preferred securities solely in debentures issued by the Company. The trusts’ only assets are the principal balance of the Debentures and the related interest receivable, which are included within long-term debt in our Consolidated Statements of Financial Condition. The Company is not the primary beneficiary of the trusts and accordingly, the trusts are not consolidated in our financial statements.

Community reinvestment investments – We hold certain investments in funds that make investments to further our community reinvestment initiatives. Such investments are included within other assets in our Consolidated Statements of Financial Condition. Certain of these investments meet the definition of a VIE, but the Company is not the primary beneficiary as we are a limited investor in those investment funds and do not have the power to direct their investment activities. Accordingly, we will continue to account for our interests in these investments on an unconsolidated basis. Our maximum exposure to loss is limited to the carrying amount plus additional required future capital contributions.

A portion of our community reinvestment investments are investments in limited liability entities that invest in affordable housing projects that qualify for low-income housing tax credits. These investments entitle the Company to tax credits through 2030. As described in Note 2, "Recently Adopted Accounting Pronouncements," as of January 1, 2014, the Company adopted new guidance that permits the Company to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Prior to adoption of this guidance, the Company accounted for all of its investments in qualified affordable housing projects using the effective yield method. As permitted under the new guidance, the Company has elected to continue accounting for preexisting tax credit investments using the effective yield method. Any new investments in qualified affordable housing projects entered into on or after January 1, 2014 that meet certain conditions will be accounted for using the proportional amortization method. Since adoption, during third quarter 2014, the Company entered into one new investment in qualified affordable housing projects that will be accounted for using the proportional amortization method.

The carrying value of the Company’s tax credit investments totaled $4.2 million and $3.0 million as of September 30, 2014 and December 31, 2013, respectively. The Company recognizes tax credits related to these investments, tax benefits from the operating losses generated by these investments, and amortization of the principal investment balances, all of which were immaterial during each of the nine months ended September 30, 2014 and 2013. Commitments to provide future capital contributions totaling $3.3 million as of September 30, 2014, are expected to be paid through 2022. These investments are reviewed periodically for impairment. No impairment losses have been recorded for the nine months ended September 30, 2014 and 2013 resulting from the forfeiture or ineligibility of tax credits.

Troubled debt restructured loans – For certain troubled commercial loans, we restructure the terms of the borrower’s debt in an effort to increase the probability of collecting amounts contractually due. Following a TDR, the borrower entity typically meets the definition of a VIE, and economic events have proven that the entity’s equity is not sufficient to permit it to finance its activities without additional subordinated financial support or a restructuring of the terms of its financing. As we do not have the power to direct the activities that most significantly impact such troubled commercial borrowers’ operations, we are not considered the primary beneficiary even in situations where, based on the size of the financing provided, we are exposed to potentially significant

51

benefits and losses of the borrowing entity. We have no contractual requirements to provide financial support to the borrowing entities beyond certain funding commitments established upon restructuring of the terms of the debt. Our interests in the troubled commercial borrowers include outstanding loans and related derivative assets. Our maximum exposure to loss is limited to these interests plus any additional future funding commitments.

19. SUBSEQUENT EVENTS

Trust Preferred Securities and Long-term Debt Redemption - October 2014

On October 8, 2014, Capital Trust IV redeemed $75.0 million of the $143.8 million issued and outstanding 10.00% Trust Preferred Securities. The redemption price was the liquidation amount of $25 per trust preferred security, together with accrued and unpaid interest to the redemption date, which totaled approximately $479,000 in the aggregate.

The redemption of the Trust Preferred Securities is a result of the redemption by PrivateBancorp of approximately $75.0 million of the outstanding 10.00% Junior Subordinated Debentures due June 2068 (the “Debentures”), all of which are held by Capital Trust IV. We used available cash to fund the redemption. The proceeds from the partial redemption of the Debentures were applied to redeem a proportionate amount of the Trust Preferred Securities and the Trust’s common securities, which totaled $75.0 million of Trust Preferred Securities and $5,225 of Trust common securities. In connection with the redemption, PrivateBancorp recorded approximately $2.4 million in interest expense, representing unamortized debt issuance costs associated with the proportionate amount of Debentures redeemed.

Branch Sale

On October 8, 2014, we announced that we entered into an agreement to sell our branch office located in Norcross, Georgia. The transaction includes the sale of certain deposits and loans made to retail and small business banking clients, which at September 30, 2014 totaled $128.5 million of deposits and $39.3 million of loans, each classified as held-for-sale. Subject to regulatory approval and certain other customary closing conditions, the transaction is expected to close before the end of 2014.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

PrivateBancorp, Inc. ("PrivateBancorp," we or the "Company"), is a Delaware corporation and bank holding company headquartered in Chicago, Illinois. The PrivateBank and Trust Company (the "Bank" or the "PrivateBank"), our bank subsidiary, provides customized business and personal financial services to middle market companies and business owners, executives, entrepreneurs and families in all the markets and communities we serve. As of September 30, 2014, we had 34 offices located in ten states, primarily in the Midwest, with a majority of our business conducted in the greater Chicago market.

We deliver a full spectrum of commercial and personal banking products and services to our clients through our commercial banking, community banking and private wealth businesses. We offer clients a full range of lending, treasury management, capital markets and other banking products to meet their commercial needs, and residential mortgage banking, private banking and asset management services to meet their personal needs.

The following discussion and analysis should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes presented elsewhere in this report, as well as our audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2013. Results of operations for the nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014. Unless otherwise stated, all earnings per share data included in this section and through the remainder of this discussion are presented on a diluted basis.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Statements contained in this report that are not historical facts may constitute forward-looking statements within the meaning of federal securities laws. Forward-looking statements represent management's beliefs and expectations regarding future events, such as our anticipated future financial results, credit quality, revenues, expenses, or other financial items, and the impact of business plans and strategies or legislative or regulatory actions. Forward-looking statements are typically identified by words such as "may," "might," "will," "should," "could," "would," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "project," "potential," or "continue" or other comparable terminology.

52


Our ability to predict results or the actual effects of future plans, strategies or events is inherently uncertain. Factors which could cause actual results to differ from those reflected in forward-looking statements include:

•
continued uncertainty regarding U.S. and global economic outlook that may impact market conditions or affect demand for certain banking products and services;
•
unanticipated developments in pending or prospective loan transactions or greater than expected paydowns or payoffs of existing loans;
•
unanticipated changes in interest rates;
•
competitive pressures in the financial services industry that may affect the pricing of the Company’s loan and deposit products as well as its services;
•
unforeseen credit quality problems or changing economic conditions that could result in charge-offs greater than we have anticipated in our allowance for loan losses or changes in value of our investments;
•
lack of sufficient or cost-effective sources of liquidity or funding as and when needed;
•
loss of key personnel or an inability to recruit and retain appropriate talent;
•
greater than anticipated costs associated with compliance or regulatory burdens, or investments in technology or other infrastructure enhancements;
•
failures or disruptions to our data processing or other information or operational systems, including the potential impact of disruptions or breaches at our third party service providers;
•
difficulties in obtaining necessary regulatory approvals, failure to satisfy other closing conditions, or unforeseen difficulties related to the completion of the data processing conversion, and of which could delay or prevent the sale of the Norcross, Georgia branch office; or
•
changes in the amounts of deposits or loans to be sold at closing or greater than anticipated costs associated with the sale of the Norcross, Georgia branch office, any of which could affect the amount of the gain on sale of the branch.

These factors should be considered in evaluating forward-looking statements and undue reliance should not be placed on our forward-looking statements. Readers should also consider the risks, assumptions and uncertainties set forth in the "Risk Factors" section of our Annual Report on Form 10-K for our fiscal year ended December 31, 2013 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this Form 10-Q, as well as those set forth in our subsequent periodic and current reports filed with the SEC. Forward-looking statements speak only as of the date they are made and we assume no obligation to update any of these statements in light of new information, future events or otherwise unless required under the federal securities laws.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"), and our accounting policies are consistent with predominant practices in the financial services industry. Critical accounting policies are those policies that require management to make the most significant estimates, assumptions, and judgments based on information available at the date of the financial statements that affect the amounts reported in the financial statements and accompanying notes. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the consolidated financial statements. Management has determined that our accounting policies with respect to the allowance for loan losses, goodwill and intangible assets, income taxes and fair value measurements are the accounting areas requiring subjective or complex judgments that are most important to our financial position and results of operations, and, as such, are considered to be critical accounting policies. For additional information regarding critical accounting policies, refer to “Summary of Significant Accounting Policies,” presented in Note 1 to the Condensed Consolidated Financial Statements and the section titled “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2013 Annual Report on Form 10-K. There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2013.

USE OF NON-U.S. GAAP FINANCIAL MEASURES

This report contains both U.S. GAAP and non-U.S. GAAP financial measures. These non-U.S. GAAP financial measures include (i) net interest income, net interest margin, net revenue, operating profit, and efficiency ratio which are presented on a fully taxable-equivalent basis and (ii) return on average tangible common equity, Tier 1 common equity to risk-weighted assets, tangible common equity to risk-weighted assets, tangible common equity to tangible assets, and tangible book value. We believe that presenting these non-U.S. GAAP financial measures provides information useful to investors in understanding our underlying operational performance, business and performance trends, and facilitates comparisons with the performance of other similar companies in the banking industry. Where non-U.S. GAAP financial measures are used, the comparable U.S. GAAP financial measure, as well as a reconciliation to the comparable U.S. GAAP financial measure, can be found in Table 29. These disclosures should not be

53

viewed as a substitute for operating results determined in accordance with U.S. GAAP, nor are they necessarily comparable to non-U.S. GAAP performance measures that may be presented by other companies.

THIRD QUARTER 2014 OVERVIEW

For the quarter ended September 30, 2014, we reported net income available to common stockholders of $40.5 million, an increase of $7.5 million, or 23%, compared to $33.1 million for third quarter 2013, and consistent compared to $40.8 million for second quarter 2014. Diluted earnings per share was $0.51, an increase of 21% compared to $0.42 per diluted share in the third quarter 2013, and consistent compared to $0.52 per share in the previous quarter. For the nine months ended September 30, 2014, net income available to common stockholders increased 30% to $115.9 million from $89.2 million for the same period last year. Diluted earnings per share was $1.47, a 29% increase compared to $1.14 per diluted share in the same period last year. For the quarter ended September 30, 2014, our annualized return on average assets grew to 1.09% and our annualized return on average common equity grew to 11.27%, both meaningful improvements from the year ago quarter when these performance ratios were 0.96% and 10.43%, respectively. Our efficiency ratio improved to 52.5% for the quarter ended September 30, 2014, compared to 53.0% in the third quarter 2013.

Compared to the third quarter 2013, the increase in earnings for the current quarter was mainly attributable to an increase in net interest income as a result of significant loan growth over the past four quarters, as well as reduced credit-related costs, including lower provision for loan losses. These same factors contributed to an increase in operating profit of $7.2 million to $70.4 million for third quarter 2014 compared to $63.2 million for third quarter 2013. Net revenue was $148.2 million, up $13.8 million from the third quarter 2013, as loan growth and lower funding costs offset the impact of declining loan yields. Net interest income for third quarter 2014 increased $10.9 million compared to the third quarter 2013, driven by higher interest income on $1.1 billion growth in average interest-earning assets compared to the prior year quarter and reduced cost of funds. Net interest margin increased 5 basis point to 3.23% for third quarter 2014 compared to 3.18% for the year ago quarter and was aided by a one-time loan fee of $900,000 in third quarter 2014 and the prepayment of $120.0 million subordinated debt in fourth quarter 2013. Non-interest income for the current quarter increased $2.9 million to $30.7 million compared to the third quarter 2013 primarily due to a 58% increase in loan syndication fees, along with an increase in treasury management revenue offset by a decline in capital markets income. Non-interest expenses increased from the prior year quarter, primarily driven by an increase in incentive compensation accruals tied to improved performance, offset by meaningful declines in various credit-related costs consistent with a reduced level of other real estate owned ("OREO") and problem loans.
 
Credit quality metrics as of September 30, 2014 continue to improve from levels at year end 2013, with a 26% decline in nonperforming assets largely attributable to payoffs and paydowns of nonperforming loans and sales of OREO and nonperforming loans. At September 30, 2014, other real estate owned was $17.3 million, a reduction of $11.3 million from December 31, 2013. Nonperforming assets to total assets were 0.60% at September 30, 2014, compared to 0.87% at December 31, 2013. Nonperforming loans to total loans were 0.64% at September 30, 2014, compared to 0.89% at December 31, 2013. At September 30, 2014, our allowance for loan losses as a percentage of total loans was 1.30%, compared to 1.34% at December 31, 2013. Net charge-offs totaled $88,000 in third quarter 2014 as compared to $10.5 million in the third quarter 2013, while the provision for loan losses declined by $4.1 million to $3.7 million in the third quarter 2014, compared to $7.8 million for third quarter 2013.

Total loans grew 8% to $11.5 billion at September 30, 2014, from $10.6 billion at year end 2013, primarily driven by commercial and industrial loans to new clients. Total commercial and industrial loans comprised 68% of total loans at September 30, 2014, compared to 67% at both year end 2013 and at September 30, 2013.

Total deposits at September 30, 2014 increased 7% to $12.8 billion from year end 2013 primarily driven by increases in money market accounts. Money market accounts comprised 39% of total deposits at September 30, 2014. Given the commercial focus of our core business strategy, a majority of our deposit base is interest-bearing deposits comprised of corporate accounts, which are typically larger than retail accounts, and are heavily influenced by the cash positions of our commercial middle market clients, which will fluctuate based on their business needs.

Branch Sale

On October 8, 2014, we announced that we entered into an agreement to sell our branch office located in Norcross, Georgia. The transaction includes the sale of certain deposits and loans made to retail and small business banking clients, which at September 30, 2014 totaled $128.5 million of deposits and $39.3 million of loans each classified as held-for-sale. The sale will not impact clients associated with our commercial middle market business development office in downtown Atlanta, Georgia. We expect to recognize an estimated gain on sale of approximately $0.03 to $0.04 per share upon the closing of the transaction, which is expected before the end of 2014, subject to regulatory approval and certain other customary closing conditions.

54

Trust Preferred Securities and Long-term Debt Redemption - October 2014

On October 8, 2014, Capital Trust IV ("Trust IV") redeemed $75.0 million of the $143.8 million issued and outstanding 10% Trust Preferred Securities. The redemption price was the liquidation amount of $25 per trust preferred security, together with accrued and unpaid interest to the redemption date, which totaled approximately $479,000 in the aggregate.

The redemption of the Trust Preferred Securities is a result of the redemption by the Company of approximately $75.0 million of the outstanding 10% Junior Subordinated Debentures due June 2068 (the “10% Debentures”), all of which are held by Trust IV. We used available cash to fund the redemption. The proceeds from the partial redemption of the 10% Debentures were applied to redeem a proportionate amount of the Trust Preferred Securities and Trust's common securities, which totaled $75.0 million of Trust Preferred Securities and $5,225 of Trust common stock. In connection with the redemption, we recorded approximately $2.4 million in interest expense, representing unamortized debt issuance costs associated with the proportionate amount of 10% Debentures redeemed. Going forward, this redemption is estimated to eliminate approximately $1.9 million of pre-tax interest expense per quarter based on our funding costs for the third quarter 2014. While we have no current plans to redeem the remaining $68.8 million of the 10% Debentures, the timing and approach of any future redemption is subject to market conditions and other factors.

At September 30, 2014, the Company's total risk-based capital ratio and Tier 1 risk-based capital ratio was 13.18% and 11.12%, respectively. On a proforma basis, after giving effect for the redemption of the 10% Debentures, the Company's total risk-based capital ratio and Tier 1 risk-based capital ratio would have been 12.64% and 10.58%, respectively, at September 30, 2014.

Please refer to the remaining sections of "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for greater discussion of the various components of our 2014 performance, statement of financial condition and liquidity.


55

The following table presents selected quarterly financial data highlighting operating performance trends over the past year.

Table 1
Consolidated Financial Highlights
(Dollars in thousands, except per share data)
 
 
As of and for the Quarter Ended
 
2014
 
2013
 
September 30
 
June 30
 
March 31
 
December 31
 
September 30
Selected Operating Statistics
 
 
 
 
 
 
 
 
 
Net income
$
40,527

 
$
40,824

 
$
34,505

 
$
33,706

 
$
33,058

Effective tax rate
38.3
%
 
38.9
%
 
37.9
%
 
38.6
%
 
39.0
%
Net interest income
$
116,758

 
$
112,351

 
$
108,752

 
$
108,456

 
$
105,835

Fee revenue (1)
30,666

 
30,063

 
25,905

 
26,641

 
27,655

Net revenue (2)
148,238

 
143,354

 
135,788

 
136,036

 
134,426

Operating profit (2)
70,402

 
67,889

 
60,038

 
60,209

 
63,157

Provision for loan losses (3)
3,732

 
2,011

 
3,449

 
4,910

 
7,797

Per Share Data
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.52

 
$
0.52

 
$
0.44

 
$
0.43

 
$
0.42

Diluted earnings per share
0.51

 
0.52

 
0.44

 
0.43

 
0.42

Tangible book value at period end (2)(4)
$
17.08

 
$
16.61

 
$
15.90

 
$
15.43

 
$
15.05

Dividend payout ratio
1.92
%
 
1.92
%
 
2.27
%
 
2.33
%
 
2.38
%
Performance Ratios
 
 
 
 
 
 
 
 
 
Return on average common equity
11.27
%
 
11.88
%
 
10.48
%
 
10.28
%
 
10.43
%
Return on average assets
1.09
%
 
1.14
%
 
1.00
%
 
0.96
%
 
0.96
%
Return on average tangible common equity (2)
12.27
%
 
12.97
%
 
11.50
%
 
11.33
%
 
11.55
%
Net interest margin (2)
3.23
%
 
3.21
%
 
3.23
%
 
3.18
%
 
3.18
%
Efficiency ratio (2)(5)
52.51
%
 
52.64
%
 
55.79
%
 
55.74
%
 
53.02
%
Credit Quality (3)
 
 
 
 
 
 
 
 
 
Total nonperforming loans to total loans
0.64
%
 
0.69
%
 
0.86
%
 
0.89
%
 
1.09
%
Total nonperforming assets to total assets
0.60
%
 
0.66
%
 
0.82
%
 
0.87
%
 
1.07
%
Allowance for loan losses to total loans
1.30
%
 
1.32
%
 
1.34
%
 
1.34
%
 
1.40
%
Balance Sheet Highlights
 
 
 
 
 
 
 
 
 
Total assets
$
15,190,468

 
$
14,602,404

 
$
14,304,782

 
$
14,085,746

 
$
13,869,140

Average interest-earning assets
14,283,920

 
13,936,754

 
13,564,530

 
13,472,632

 
13,154,557

Loans (3)
11,547,587

 
11,136,942

 
10,924,985

 
10,644,021

 
10,409,443

Allowance for loan losses (3)
(150,135
)
 
(146,491
)
 
(146,768
)
 
(143,109
)
 
(145,513
)
Deposits, excluding deposits held-for-sale
12,849,204

 
12,236,201

 
11,886,161

 
12,013,641

 
11,832,556

Noninterest-bearing deposits
$
3,342,862

 
$
3,387,424

 
$
3,103,736

 
$
3,172,676

 
$
3,106,986

Loans to deposits (3)
89.87
%
 
91.02
%
 
91.91
%
 
88.60
%
 
87.97
%


56

 
As of
 
2014
 
2013
 
September 30
 
June 30
 
March 31
 
December 31
 
September 30
Capital Ratios
 
 
 
 
 
 
 
 
 
Total risk-based capital
13.18
%
 
13.41
%
 
13.39
%
 
13.30
%
 
13.48
%
Tier 1 risk-based capital
11.12
%
 
11.24
%
 
11.19
%
 
11.08
%
 
11.05
%
Tier 1 leverage ratio
10.70
%
 
10.63
%
 
10.60
%
 
10.37
%
 
10.32
%
Tier 1 common equity to risk-weighted assets (2)(6)
9.38
%
 
9.42
%
 
9.33
%
 
9.19
%
 
9.11
%
Tangible common equity to tangible assets (2)(7)
8.84
%
 
8.94
%
 
8.74
%
 
8.57
%
 
8.49
%
(1) 
Computed as total non-interest income less net securities gains (losses).
(2) 
This is a non-U.S. GAAP financial measure. Refer to Table 29 for a reconciliation of non-U.S. GAAP to U.S. GAAP measures.
(3) 
Excludes covered assets.
(4) 
Computed as total equity less preferred stock, goodwill and other intangibles divided by outstanding shares of common stock at end of period.
(5) 
Computed as non-interest expense divided by the sum of net interest income on a tax equivalent basis (assuming a federal income tax rate of 35%) and non-interest income.
(6) 
For purposes of our presentation, we calculate this ratio under currently effective requirements and without giving effect to the final Basel III capital rules adopted and issued by the Federal Reserve Board in July 2013, which are effective January 1, 2014 with compliance required no later than January 1, 2015.  
(7) 
Computed as tangible common equity divided by tangible assets, where tangible common equity equals total equity less preferred stock, goodwill and other intangible assets and tangible assets equals total assets less goodwill and other intangible assets.
 
RESULTS OF OPERATIONS

Net Interest Income

Net interest income is the primary source of the Company's revenue. Net interest income is the difference between interest income and fees earned on interest-earning assets, such as loans and investments, and interest expense incurred on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is affected by the volume, pricing, mix and maturity of earning assets and interest-bearing liabilities; the volume and value of noninterest-bearing sources of funds, such as noninterest-bearing deposits and equity; the use of derivative instruments to manage interest rate risk; the sensitivity of the balance sheet to fluctuations in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, repricing frequencies, and loan repayment behavior; and asset quality.

Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest-earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average interest-earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds, principally noninterest-bearing demand deposits and equity, also support interest-earning assets.

The accounting policies underlying the recognition of interest income on loans, securities, and other interest-earning assets are included in Note 1 of "Notes to Consolidated Financial Statements" contained in our 2013 Annual Report on Form 10-K.

For purposes of this discussion, net interest income and any ratios or metrics that include net interest income as a component, such as net interest margin, have been adjusted to a fully tax-equivalent basis to more appropriately compare the returns on certain tax-exempt securities to those on taxable securities, assuming a federal income tax rate of 35%. The effect of the tax-equivalent adjustment is presented at the bottom of the following table.

Quarter ended September 30, 2014 compared to quarter ended September 30, 2013

Table 2 summarizes the changes in our average interest-earning assets and interest-bearing liabilities as well as the average interest rates earned and paid on these assets and liabilities, respectively, for the quarters ended September 30, 2014 and 2013. The table also presents the trend in net interest margin on a quarterly basis for 2014 and 2013, including the tax-equivalent yields on interest-earning assets and rates paid on interest-bearing liabilities. In addition, Table 2 details variances in income and expense for each

57

of the major categories of interest-earning assets and interest-bearing liabilities and indicates the extent to which such variances are attributable to volume and rate changes.


Table 2
Net Interest Income and Margin Analysis
(Dollars in thousands)
 
 
Quarter Ended September 30,
 
 
Attribution of Change in Net Interest Income (1)
 
2014
 
 
2013
 
 
 
Average
Balance
 

Interest (2)
 
Yield/
Rate
(%)
 
 
Average
Balance
 

Interest (2)
 
Yield/
Rate
(%)
 
 
Volume
 
Yield/
Rate
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and interest-bearing deposits in banks
$
230,829

 
$
142

 
0.24
%
 
 
$
178,213

 
$
111

 
0.24
%
 
 
$
32

 
$
(1
)
 
$
31

Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
2,272,066

 
13,370

 
2.35
%
 
 
2,264,991

 
12,931

 
2.28
%
 
 
40

 
399

 
439

Tax-exempt (3)
291,172

 
2,340

 
3.22
%
 
 
254,662

 
2,380

 
3.74
%
 
 
317

 
(357
)
 
(40
)
Total securities
2,563,238

 
15,710

 
2.45
%
 
 
2,519,653

 
15,311

 
2.43
%
 
 
357

 
42

 
399

FHLB stock
28,666

 
48

 
0.65
%
 
 
34,063

 
61

 
0.71
%
 
 
(9
)
 
(4
)
 
(13
)
Loans, excluding covered assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
7,751,264

 
85,516

 
4.32
%
 
 
6,834,597

 
75,429

 
4.32
%
 
 
10,113

 
(26
)
 
10,087

Commercial real estate
2,556,825

 
23,447

 
3.59
%
 
 
2,503,758

 
23,467

 
3.67
%
 
 
492

 
(512
)
 
(20
)
Construction
380,876

 
3,856

 
3.96
%
 
 
224,671

 
2,304

 
4.01
%
 
 
1,581

 
(29
)
 
1,552

Residential
362,297

 
3,240

 
3.58
%
 
 
362,708

 
3,473

 
3.83
%
 
 
(4
)
 
(229
)
 
(233
)
Personal and home equity
340,163

 
2,520

 
2.94
%
 
 
362,293

 
2,938

 
3.22
%
 
 
(173
)
 
(245
)
 
(418
)
Total loans, excluding covered assets(4)
11,391,425

 
118,579

 
4.08
%
 
 
10,288,027

 
107,611

 
4.10
%
 
 
12,009

 
(1,041
)
 
10,968

Covered assets (5)
69,762

 
632

 
3.56
%
 
 
134,601

 
1,301

 
3.80
%
 
 
(592
)
 
(77
)
 
(669
)
Total interest-earning assets (3)
14,283,920

 
$
135,111

 
3.72
%
 
 
13,154,557

 
$
124,395

 
3.71
%
 
 
$
11,797

 
$
(1,081
)
 
$
10,716

Cash and due from banks
153,849

 
 
 
 
 
 
149,953

 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and covered loan losses
(156,632
)
 
 
 
 
 
 
(177,274
)
 
 
 
 
 
 
 
 
 
 
 
Other assets
465,897

 
 
 
 
 
 
525,426

 
 
 
 
 
 
 
 
 
 
 
Total assets
$
14,747,034

 
 
 
 
 
 
$
13,652,662

 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity (6):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
1,191,688

 
$
918

 
0.31
%
 
 
$
1,360,664

 
$
1,032

 
0.30
%
 
 
$
(130
)
 
$
16

 
$
(114
)
Savings deposits
286,807

 
215

 
0.30
%
 
 
251,299

 
148

 
0.23
%
 
 
23

 
44

 
67

Money market accounts
4,934,436

 
3,958

 
0.32
%
 
 
4,369,938

 
3,747

 
0.34
%
 
 
463

 
(252
)
 
211

Time and brokered time deposits
2,706,474

 
5,723

 
0.84
%
 
 
2,747,502

 
5,014

 
0.72
%
 
 
(279
)
 
988

 
709

Total interest-bearing deposits
9,119,405

 
10,814

 
0.47
%
 
 
8,729,403

 
9,941

 
0.45
%
 
 
77

 
796

 
873

Short-term and secured borrowings
66,439

 
158

 
0.93
%
 
 
118,995

 
161

 
0.53
%
 
 
(91
)
 
88

 
(3
)
Long-term debt
630,706

 
6,570

 
4.16
%
 
 
499,793

 
7,640

 
6.08
%
 
 
1,714

 
(2,784
)
 
(1,070
)
Total interest-bearing liabilities
9,816,550

 
17,542

 
0.71
%
 
 
9,348,191

 
17,742

 
0.75
%
 
 
1,700

 
(1,900
)
 
(200
)
Noninterest-bearing demand deposits
3,381,787

 
 
 
 
 
 
2,899,125

 
 
 
 
 
 
 
 
 
 
 
Other liabilities
122,424

 
 
 
 
 
 
147,805

 
 
 
 
 
 
 
 
 
 
 
Equity
1,426,273

 
 
 
 
 
 
1,257,541

 
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
$
14,747,034

 
 
 
 
 
 
$
13,652,662

 
 
 
 
 
 
 
 
 
 
 
Net interest spread (3)(6)
 
 
 
 
3.01
%
 
 
 
 
 
 
2.96
%
 
 
 
 
 
 
 
Contribution of noninterest-bearing sources of funds
 
 
 
 
0.22
%
 
 
 
 
 
 
0.22
%
 
 
 
 
 
 
 
Net interest income/margin (3)(6)
 
 
117,569

 
3.23
%
 
 
 
 
106,653

 
3.18
%
 
 
$
10,097

 
$
819

 
$
10,916

Less: tax equivalent adjustment
 
 
811

 
 
 
 
 
 
818

 
 
 
 
 
 
 
 
 
Net interest income, as reported
 
 
$
116,758

 
 
 
 
 
 
$
105,835

 
 
 
 
 
 
 
 
 
(footnotes on following page)

58

Table 2
Net Interest Income and Margin Analysis (Continued)
(Dollars in thousands)

 
Quarterly Net Interest Margin Trend
 
2014
 
2013
 
Third
 
Second
 
First
 
Fourth
 
Third
 
Second
 
First
Yield on interest-earning assets (3)
3.72
%
 
3.69
%
 
3.72
%
 
3.69
%
 
3.71
%
 
3.77
%
 
3.75
%
Cost of interest-bearing liabilities (6)
0.71
%
 
0.69
%
 
0.70
%
 
0.73
%
 
0.75
%
 
0.78
%
 
0.80
%
Net interest spread (3)(6)
3.01
%
 
3.00
%
 
3.02
%
 
2.96
%
 
2.96
%
 
2.99
%
 
2.95
%
Contribution of noninterest-bearing sources of funds
0.22
%
 
0.21
%
 
0.21
%
 
0.22
%
 
0.22
%
 
0.23
%
 
0.24
%
Net interest margin (3)(6)
3.23
%
 
3.21
%
 
3.23
%
 
3.18
%
 
3.18
%
 
3.22
%
 
3.19
%
(1) 
For purposes of this table, changes which are not due solely to volume changes or rate changes are allocated to such categories in proportion to the absolute amounts of the change in each.
(2) 
Interest income included $7.7 million and $5.9 million in net loan fees for the quarters ended September 30, 2014 and 2013, respectively.
(3) 
Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(4) 
Includes loans held-for-sale and nonaccrual loans. Average loans on a nonaccrual basis for the recognition of interest income totaled $76.9 million and $118.8 million for the quarters ended September 30, 2014 and 2013, respectively. Interest foregone on impaired loans was estimated to be approximately $763,000 and $1.2 million for the quarters ended September 30, 2014 and 2013, respectively, calculated based on the average loan portfolio yield for the respective period.
(5) 
Covered interest-earning assets consist of loans acquired through a Federal Deposit Insurance Corporation ("FDIC")-assisted transaction that are subject to a loss share agreement and the related indemnification asset. Refer to the section entitled "Covered Assets" for a detailed discussion.
(6) 
Includes deposits held-for-sale.
 
Net interest income on a tax-equivalent basis increased $10.9 million, or 10%, to $117.6 million for third quarter 2014, compared to $106.7 million for the third quarter 2013. Interest income for the third quarter 2014 increased $10.7 million compared to the same period a year ago primarily due to $1.1 billion in higher average loan balances, despite a decline in loan yields. The increase in net interest income also benefited from a $200,000 decrease in interest expense driven primarily by a $1.1 million reduction in interest costs on long-term debt attributable in part to the retirement of $120 million of subordinated debt in fourth quarter 2013, offset by $873,000 in higher deposit costs primarily due to the replacement of maturing brokered time deposits with those of longer maturities.

Average interest-earning assets grew $1.1 billion from the prior year period primarily driven by a $916.7 million increase in average commercial loan balances. Average interest-bearing deposits grew $390.0 million from the prior year period reflecting an increase in average money market and savings deposits, offset by decreases in average interest-bearing demand and time and brokered time deposits. In the third quarter 2014, average short-term debt declined $52.6 million while average long-term debt increased $130.9 million, primarily as a result of FHLB short-term advances shifting to long-term advances in the current period. Average long-term FHLB advances increased $250.9 million in third quarter 2014 compared to the prior year period. In addition, the average long-term debt in the current quarter reflected a prepayment of subordinated debt in the fourth quarter 2013.
 
Net interest margin was 3.23% for the third quarter 2014, up 5 basis points from 3.18% for third quarter 2013 as the improvements in cost of funds and yields on our investment securities portfolio more than offset the decline in loan yields. Loan yields continue to be negatively impacted by decreases in LIBOR as well as downward pricing pressure on renewals in this competitive environment, however, loan yields have been aided in the current quarter by our hedging program, specialty lending activity, and non-recurring loan fees. Our commercial loan hedging program contributed 8 basis points in the quarter, compared to 6 basis points in third quarter 2013 to loan yields, and had an overall positive effect on net interest margin of 7 basis points in third quarter 2014 and 5 basis points in third quarter 2013. Approximately two-thirds of our loan portfolio is comprised of commercial loans, which include specialty lines such as healthcare and security alarm financing that can command pricing premiums due to elevated complexity, risk, and the industry expertise required. Non-recurring fee income of $900,000 contributed 3 basis points to the third quarter 2014 loan yields, compared to none in the prior year period. The 4 basis points reduction on cost of funds for the quarter was driven by reduced borrowing costs from the fourth quarter 2014 $120 million subordinated debt retirement, offset by a 2 basis point increase in deposit costs largely due to higher rates paid on longer duration brokered time deposits added during the third quarter 2014. Average noninterest-bearing deposits and average equity, our principal sources of noninterest-bearing funds, increased in total by $651.4 million from third quarter 2013, but the lower interest rate environment continues to reduce their value within the net interest margin.


59

In the continued low rate environment competition remains strong, which has influenced loan pricing. Future loan yields may be impacted quarter to quarter by fluctuations in loan fees and interest income recognized driven by among other things, recovery of interest on nonaccrual loans, acceleration of unamortized origination fees upon payoff or refinance, prepayment and other fees received on certain event driven actions in accordance with the loan agreement. We anticipate that loan yields may drift down 1 to 2 basis points each quarter until there is a meaningful increase in rates. Despite the highly competitive environment, we maintain a selective and disciplined approach to structure, pricing and overall returns as we selectively add and develop new client relationships. As discussed above, we continue to see some downward pressure on loan renewals, which remain very competitive, and has resulted in a compression on overall loan yields. We do not anticipate significant benefit to net interest margin in the near term from further downward repricing of deposits given the nature and composition of our deposit base, which is less retail and more commercial. We seek to continue to grow deposits while managing our overall funding costs.


60

Nine months ended September 30, 2014 compared to nine months ended September 30, 2013

Table 3
Net Interest Income and Margin Analysis
(Dollars in thousands)
 
Nine Months Ended September 30,
 
 
Attribution of Change in
 
2014
 
 
2013
 
 
Net Interest Income (1)
 
Average
Balance
 
Interest (2)
 
Yield/
Rate
(%)
 
 
Average
Balance
 
Interest (2)
 
Yield/
Rate
(%)
 
 
Volume
 
Yield/
Rate
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and interest-bearing deposits in banks
$
229,749

 
$
423

 
0.24
%
 
 
$
231,406

 
$
431

 
0.25
%
 
 
$
(3
)
 
$
(5
)
 
$
(8
)
Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
2,267,303

 
40,250

 
2.37
%
 
 
2,174,168

 
38,272

 
2.35
%
 
 
1,651

 
327

 
1,978

Tax-exempt (3)
275,257

 
6,845

 
3.32
%
 
 
238,470

 
7,003

 
3.92
%
 
 
997

 
(1,155
)
 
(158
)
Total securities
2,542,560

 
47,095

 
2.47
%
 
 
2,412,638

 
45,275

 
2.50
%
 
 
2,648

 
(828
)
 
1,820

FHLB stock
29,190

 
140

 
0.63
%
 
 
35,472

 
213

 
0.79
%
 
 
(34
)
 
(39
)
 
(73
)
Loans, excluding covered assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
7,476,056

 
245,097

 
4.32
%
 
 
6,667,420

 
220,836

 
4.37
%
 
 
26,532

 
(2,271
)
 
24,261

Commercial real estate
2,505,395

 
67,588

 
3.56
%
 
 
2,551,924

 
72,779

 
3.76
%
 
 
(1,309
)
 
(3,882
)
 
(5,191
)
Construction
358,370

 
10,545

 
3.88
%
 
 
202,782

 
6,308

 
4.10
%
 
 
4,595

 
(358
)
 
4,237

Residential
353,999

 
9,819

 
3.70
%
 
 
387,924

 
10,868

 
3.74
%
 
 
(942
)
 
(107
)
 
(1,049
)
Personal and home equity
352,512

 
8,020

 
3.04
%
 
 
376,130

 
9,175

 
3.26
%
 
 
(557
)
 
(598
)
 
(1,155
)
Total loans, excluding covered assets (4)
11,046,332

 
341,069

 
4.07
%
 
 
10,186,180

 
319,966

 
4.15
%
 
 
28,319

 
(7,216
)
 
21,103

Covered assets (5)
83,188

 
2,037

 
3.24
%
 
 
148,129

 
3,140

 
2.81
%
 
 
(1,534
)
 
431

 
(1,103
)
Total interest-earning assets (3)
13,931,019

 
$
390,764

 
3.71
%
 
 
13,013,825

 
$
369,025

 
3.75
%
 
 
$
29,396

 
$
(7,657
)
 
$
21,739

Cash and due from banks
149,605

 
 
 
 
 
 
145,633

 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and covered loan losses
(162,056
)
 
 
 
 
 
 
(182,425
)
 
 
 
 
 
 
 
 
 
 
 
Other assets
478,740

 
 
 
 
 
 
583,003

 
 
 
 
 
 
 
 
 
 
 
Total assets
$
14,397,308

 
 
 
 
 
 
$
13,560,036

 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity (6):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
1,227,924

 
$
2,702

 
0.29
%
 
 
$
1,292,254

 
$
3,181

 
0.33
%
 
 
$
(153
)
 
$
(326
)
 
$
(479
)
Savings deposits
285,678

 
605

 
0.28
%
 
 
257,428

 
439

 
0.23
%
 
 
52

 
114

 
166

Money market accounts
4,848,405

 
11,629

 
0.32
%
 
 
4,439,484

 
11,742

 
0.35
%
 
 
1,032

 
(1,145
)
 
(113
)
Time and brokered time deposits
2,615,772

 
15,563

 
0.80
%
 
 
2,641,163

 
15,099

 
0.76
%
 
 
(711
)
 
1,175

 
464

Total interest-bearing deposits
8,977,779

 
30,499

 
0.45
%
 
 
8,630,329

 
30,461

 
0.47
%
 
 
220

 
(182
)
 
38

Short-term borrowings
51,782

 
495

 
1.26
%
 
 
128,426

 
689

 
0.71
%
 
 
(550
)
 
356

 
(194
)
Long-term debt
628,749

 
19,554

 
4.13
%
 
 
499,793

 
22,861

 
6.06
%
 
 
5,056

 
(8,363
)
 
(3,307
)
Total interest-bearing liabilities
9,658,310

 
50,548

 
0.70
%
 
 
9,258,548

 
54,011

 
0.78
%
 
 
4,726

 
(8,189
)
 
(3,463
)
Noninterest-bearing deposits
3,229,517

 
 
 
 
 
 
2,906,584

 
 
 
 
 
 
 
 
 
 
 
Other liabilities
129,059

 
 
 
 
 
 
149,690

 
 
 
 
 
 
 
 
 
 
 
Equity
1,380,422

 
 
 
 
 
 
1,245,214

 
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
$
14,397,308

 
 
 
 
 
 
$
13,560,036

 
 
 
 
 
 
 
 
 
 
 
Net interest spread (3)(6)
 
 
 
 
3.01
%
 
 
 
 
 
 
2.97
%
 
 
 
 
 
 
 
Contribution of noninterest-bearing sources of funds
 
 
 
 
0.21
%
 
 
 
 
 
 
0.22
%
 
 
 
 
 
 
 
Net interest income/margin (3)(6)
 
 
$
340,216

 
3.22
%
 
 
 
 
$
315,014

 
3.19
%
 
 
$
24,670

 
$
532

 
$
25,202

Less: tax equivalent adjustment
 
 
2,355

 
 
 
 
 
 
2,407

 
 
 
 
 
 
 
 
 
Net interest income, as reported
 
 
$
337,861

 
 
 
 
 
 
$
312,607

 
 
 
 
 
 
 
 
 
(footnotes on following page)

61

(1) 
For purposes of this table, changes which are not due solely to volume changes or rate changes are allocated to such categories in proportion to the absolute amounts of the change in each.
(2) 
Interest income included $20.4 million and $17.3 million in loan fees for the nine months ended September 30, 2014 and 2013, respectively.
(3) 
Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%.
(4) 
Includes loans held-for-sale and nonaccrual loans. Average loans on a nonaccrual basis totaled $85.6 million and $127.4 million for the nine months ended September 30, 2014 and 2013, respectively. Interest foregone on nonperforming loans was estimated to be approximately $2.5 million and $3.8 million for the nine months ended September 30, 2014 and 2013, respectively, based on the average loan portfolio yield for the respective period.
(5) 
Covered interest-earning assets consist of loans acquired through a FDIC-assisted transaction that are subject to a loss share agreement and the related indemnification asset. Refer to the section entitled "Covered Assets" for a detailed discussion.
(6) 
Includes deposits held-for-sale.

As shown in Table 3, net interest margin was 3.22% for the nine months ended September 30, 2014 and 3.19% for the nine months ended September 30, 2013. Tax-equivalent net interest income increased $25.2 million to $340.2 million for the nine months ended September 30, 2014 from $315.0 million for the prior year period. The year-over-year increase in net interest income was primarily attributable to the $990.1 million in growth in average loans and securities, offset by lower yields on loans and securities combined with less interest income earned on the covered asset portfolio primarily due to reduced loan balances. Also contributing to the increase in net interest margin is the reduction in cost of funds of $3.5 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.

Provision for loan losses

The provision for loan losses, excluding the provision for covered loans, totaled $3.7 million for the quarter ended September 30, 2014, down from $7.8 million for the same period in 2013. For the nine months ended September 30, 2014, the provision for loan losses declined by 65%, totaling $9.2 million compared to $26.3 million for the same period in 2013. The provision for loan losses is a function of our allowance for loan loss methodology used to determine the allowance deemed adequate to cover inherent loan losses after net charge-offs have been deducted. The current quarter provision compared to the prior year quarter benefited from continuing portfolio improvement in overall credit metrics and a reduced requirement for specific reserves on a smaller population of impaired loans. Impaired loans were $95.6 million at September 30, 2014, down 34% from $145.6 million at September 30, 2013. In addition, the current quarter provision benefited from decreased net charge-offs. Net charge-offs for the quarter ended September 30, 2014 totaled $88,000 compared to net charge-offs of $10.5 million for the same period in 2013. For the nine months ended September 30, 2014, net charge-offs declined 95%, totaling $2.2 million compared to $42.2 million for the same period in 2013. For further analysis and information on how we determine the appropriate level for the allowance for loan losses and analysis of credit quality, see "Critical Accounting Policies" and "Credit Quality Management and Allowance for Loan Losses."

Provision for covered loan losses

For the quarter ended September 30, 2014, we recorded a provision in the allowance for covered loan losses related to the loans purchased under the FDIC-assisted transaction loss share agreement of $157,000 compared to $323,000 for the quarter ended September 30, 2013. For the nine months ended September 30, 2014, the release of provision for covered loan losses was $1.3 million, compared to a provision of $1.1 million of our allowance for covered loan losses for the prior year period. The release for the nine months ended September 30, 2014 was primarily attributable to $1.7 million of covered loan recoveries in the second quarter 2014 which is not anticipated to be recurring. The provision for covered loan losses represents the 20% portion of expected losses on covered loans that would not be subject to reimbursement by the FDIC. For further information regarding the FDIC-assisted transaction, see "Covered Assets."


62

Non-interest Income

Non-interest income is derived from a number of sources related to our banking activities, including mortgage banking income, fees from our Asset Management business, the sale of derivative products to clients through our capital markets group, treasury management fees, loan and credit-related fees and loan syndication fees. The following table presents a break-out of these multiple sources of revenue.

Table 4
Non-interest Income Analysis
(Dollars in thousands)
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Asset management income:
 
 
 
 
 
 
 
 
 
 
 
Managed fee income
$
3,812

 
$
4,173

 
-9

 
$
11,674

 
$
12,478

 
-6

Custodian fee income
428

 
397

 
8

 
1,353

 
1,286

 
5

Total asset management income
4,240

 
4,570

(1) 
-7

 
13,027

 
13,764

(1) 
-5

Mortgage banking
2,904

 
2,946

 
-1

 
7,162

 
10,314

 
-31

Capital markets products
3,253

 
3,921

 
-17

 
12,342

 
15,008

 
-18

Treasury management
6,935

 
6,214

 
12

 
20,210

 
18,347

 
10

Loan, letter of credit and commitment fees
4,970

 
4,384

 
13

 
14,410

 
12,743

 
13

Syndication fees
6,818

 
4,322

 
58

 
15,571

 
11,294

 
38

Deposit service charges and fees and other income
1,546

 
1,298

 
19

 
3,912

 
4,885

 
-20

Subtotal fee revenue
30,666

 
27,655

 
11

 
86,634

 
86,355

 
*

Net securities gains
3

 
118

 
-97

 
530

 
895

 
-41

Total non-interest income
$
30,669

 
$
27,773

 
10

 
$
87,164

 
$
87,250

 
*

(1) 
Includes $777,000 and $2.2 million for the quarter and nine months ended September 30, 2013, respectively, from Lodestar Investment Counsel, LLC ("Lodestar"), an investment management firm and previously a wholly-owned subsidiary of the Company, which was sold on December 31, 2013.
*
Less than 1%

Third quarter 2014 compared to third quarter 2013

Non-interest income for third quarter 2014 totaled $30.7 million, increasing $2.9 million, or 10% compared to $27.8 million for the third quarter 2013, with increases in syndication fees, treasury management, loan, letter of credit and commitment fees and deposit service charges and fees and other income contributing to the current quarter growth. These increases were partially offset by lower capital markets and asset management income. While non-interest income grew for the current quarter, certain revenue sources are transactional in nature, such as mortgage banking, capital markets and syndications fees, and accordingly, tend to fluctuate, creating unevenness period to period.


63

Asset management fee revenue declined $330,000, or 7%, from third quarter 2013. The impact of the sale of Lodestar in fourth quarter 2013 was partially offset by an increase in quarterly fees driven by the increase in assets under management and administration ("AUMA"). The following table presents the composition of AUMA, as of the dates shown.

 
 
As of
 
% Change
 
 
9/30/2014
 
12/31/2013
 
9/30/2013
 
9/30-12/31
 
9/30-9/30
AUMA:
 

 
 
 
 
 
 
 
 
Managed assets
 
$
3,392,984

 
$
3,225,689

 
$
3,143,521

 
5
 
8
Custody assets
 
3,085,861

 
2,506,291

 
2,427,093

 
23
 
27
Total AUMA
 
$
6,478,845

 
$
5,731,980

 
$
5,570,614

(1) 
13
 
16
(1) 
Includes $572.4 million of assets from Lodestar, of which $284.8 million at September 30, 2014 was retained subsequent to the sale, primarily in custody assets.

AUMA grew to $6.5 billion during the quarter compared to $5.7 billion at December 31, 2013 and $5.6 billion at September 30, 2013 with growth occurring largely in custody assets. Growth for both comparative periods is primarily attributable to continued client acquisition and efforts at cross-selling asset management services to new clients, partially offset by the impact of the performance of the overall stock market on asset valuations. The pricing on asset management accounts varies depending on the type of services provided. Managed fee income includes fees earned on investment management, personal trust and estate administration, and retirement plan and brokerage services. Custodial fee income includes fees earned on "qualified custodian," escrow accounts, and standard custody, all of which have significantly lower fees recognized than on managed assets. Fees earned on "qualified custodian" and escrow assets are typically a flat fee structure while standard custody and managed assets are generally based on the market value of the assets on the last day of the prior quarter or month and therefore subject to market volatility.

Revenue from our mortgage banking business, which includes gains on loans sold and certain mortgage related loan fees remained stable in third quarter 2014 compared to third quarter 2013, due to a lower volume of loans sold, offset by improved margins for the current quarter period compared to the prior quarter period. We sold $104.5 million of mortgage loans in the secondary market, generating gains of $2.3 million, in third quarter 2014 compared to $137.8 million of mortgage loans sold, generating gains of $2.5 million, in the prior year period. Purchase activity increased during third quarter 2014, while refinancing activity declined compared to the third quarter 2013. Application volumes are expected to benefit fourth quarter 2014 fee revenue as there has been a rise in application volume on a sequential quarter basis due to the recent decline in interest rates.

Capital markets products income declined $668,000 from third quarter 2013 to $3.3 million for third quarter 2014 and included a positive $486,000 CVA in the current quarter compared to a negative CVA of $521,000 for the third quarter 2013. The CVA represents the credit component of fair value with regard to both client-based derivatives and the related matched derivatives with interbank dealer counterparties. Exclusive of CVA, capital markets products income declined $1.7 million, or 38%, compared to third quarter 2013. The decrease was attributable to a shift in product mix by clients into transactions with lower margins and a lower level of swap activity compared to the prior year quarter. Our capital markets business opportunities are sensitive to our clients' outlook on short-term interest rates.

Treasury management income increased $721,000, or 12%, from third quarter 2013. Revenue growth for these services is driven by the acquisition of new middle-market lending clients as an expansion to their credit relationship with the Bank, and influenced by the nature of the client's business, though often subject to a three-to-six month lag of implementation. The increase reflects ongoing success in cross-selling treasury management services to new commercial clients as we continue to build client relationships. At September 30, 2014, approximately 75% of our commercial clients also have a treasury management relationship with us. Similar to loan originations, we continue to experience increased competition with treasury management services.

Loan, letter of credit, and commitment fees increased $586,000, or 13%, from third quarter 2013, primarily due to a $409,000, or 20%, increase in standby letter of credit fees and an $85,000, or 4%, increase in unused commitment fees. The majority of our unused commitment fees related to revolving facilities which at September 30, 2014 totaled $8.2 billion, of which $4.2 billion were unused. In comparison, at September 30, 2013, commitments related to revolving facilities totaled $7.3 billion, of which $4.0 billion were unused. The change from the prior year period reflects new client relationships since third quarter 2013.

Syndication fees increased $2.5 million, or 58%, to $6.8 million from third quarter 2013, reaching its highest revenue in an individual quarter. During the third quarter 2014, we participated in 31 led or co-led syndicated loan transactions, 12 of which were new during the quarter, retaining $415.7 million in commitments and resulting in $6.8 million of syndication fee revenue. The prior year period included 16 led or co-led syndicated loan transactions, retaining $323.1 million in commitments and resulting

64

in $4.3 million of syndication fee revenue. Syndication fees tend to fluctuate period to period depending on market conditions, loan origination trends, and portfolio management decisions.

Nine months ended September 30, 2014 compared to nine months ended September 30, 2013

Non-interest income for the nine months ended September 30, 2014 totaled $87.2 million, comparable to $87.3 million in the nine months ended September 30, 2013. Excluding net securities gains, non-interest income of $86.6 million for the nine months ended September 30, 2014 was comparable to the prior year period.

Asset management fee revenue declined 5% to $13.0 million for the nine months ended September 30, 2014 compared to the previous year like period. Growth in AUMA, improved market performance, new client relationships (which helped increase managed assets), and an increase in core custodial assets partially offset the absence of fees from Lodestar in the current year period as a result of the sale of Lodestar at year end 2013 (see AUMA table above).

Revenue from our mortgage banking business declined 31% to $7.2 million in the current year to date period, compared to $10.3 million in the previous year period. The decrease resulted from the lower volume of loans sold partially offset by improved margins for the current year to date period compared to the prior year period. We sold $249.5 million of mortgage loans in the secondary market, generating gains of $5.7 million, in the nine months ended September 30, 2014 compared to $444.2 million of mortgage loans sold, generating gains of $8.7 million, for the prior year period.

Capital markets income declined $2.7 million in the current year to date period compared to the previous year like period and included a positive $171,000 CVA in 2014 compared to a positive CVA of $1.6 million for the like period in 2013. Exclusive of CVA adjustments, year-over-year capital markets income declined by $1.2 million, or 9%, to $12.2 million in the current period compared to $13.4 million in the nine months ended September 30, 2013. Compared to the prior year period, the decrease was attributable to a shift in product mix by clients into transactions with lower margins and a lower level of swap activity compared to the prior year comparative period.

Treasury management income increased $1.9 million, or 10%, compared to the nine months ended September 30, 2013. The increase reflected the on-boarding of new clients as a result of ongoing success in cross-selling treasury management services to new commercial clients and, to a lesser extent, a decrease in our earnings credit rate in the latter part of 2013.

Loan, letter of credit, and commitment fees increased $1.7 million, or 13%, from the nine months ended September 30, 2013, due to higher levels of standby letter of credit and unused commitment fees compared to the prior year period.

Syndication fees increased $4.3 million, or 38%, from the nine months ended September 30, 2013. The increase is attributable to a greater amount of fees recognized on a higher volume of transactions and improved pricing from both planned and opportunistic transactions related to the high level of fourth quarter 2013 loan origination activity and deals in the first nine months of 2014.

Deposit service charges and fees and other income declined $1.0 million, or 20%, for the nine months ended September 30, 2014 compared to the prior year period, largely due to the recognition of a $1.1 million gain on loan disposition recognized in the first quarter 2013.


65

Non-interest Expense

Table 5
Non-interest Expense Analysis
(Dollars in thousands)
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Compensation expense:
 
 
 
 
 
 
 
 
 
 
 
Salaries and wages
$
26,178

 
$
23,639

 
11

 
$
76,822

 
$
71,051

 
8

Share-based costs
3,872

 
3,261

 
19

 
11,449

 
9,360

 
22

Incentive compensation and commissions
12,294

 
10,753

 
14

 
31,031

 
28,704

 
8

Payroll taxes, insurance and retirement costs
4,077

 
3,707

 
10

 
16,144

 
15,239

 
6

Total compensation expense
46,421

 
41,360

 
12

 
135,446

 
124,354

 
9

Net occupancy expense
7,807

 
7,558

 
3

 
23,311

 
22,479

 
4

Technology and related costs
3,362

 
3,343

 
1

 
9,850

 
10,283

 
-4

Marketing
3,752

 
2,986

 
26

 
9,754

 
8,998

 
8

Professional services
2,626

 
2,465

 
7

 
8,290

 
6,146

 
35

Outsourced servicing costs
1,736

 
1,607

 
8

 
5,050

 
5,205

 
-3

Net foreclosed property expense
1,631

 
4,396

 
-63

 
7,225

 
16,594

 
-56

Postage, telephone, and delivery
839

 
852

 
-2

 
2,591

 
2,676

 
-3

Insurance
3,077

 
2,590

 
19

 
8,996

 
7,933

 
13

Loan and collection
2,099

 
1,345

 
56

 
4,728

 
6,402

 
-26

Other operating expense:
 
 
 
 


 
 
 
 
 
 
Supplies and printing
161

 
243

 
-34

 
482

 
533

 
-10

Subscriptions and dues
284

 
247

 
15

 
866

 
675

 
28

Education and training
261

 
413

 
-37

 
824

 
978

 
-16

Internal travel and entertainment
450

 
307

 
47

 
1,190

 
939

 
27

Investment manager expense
691

 
566

 
22

 
2,073

 
1,632

 
27

Bank charges
265

 
287

 
-8

 
730

 
819

 
-11

Intangibles amortization
755

 
780

 
-3

 
2,266

 
2,342

 
-3

Provision for unfunded commitments
481

 
(1,346
)
 
136

 
638

 
844

 
-24

Other expenses
1,138

 
1,270

 
-10

 
4,741

 
7,655

 
-38

Total other operating expenses
4,486

 
2,767

 
62

 
13,810

 
16,417

 
-16

Total non-interest expense
$
77,836

 
$
71,269

 
9

 
$
229,051

 
$
227,487

 
1

Full-time equivalent ("FTE") employees at period end
1,168

 
1,114

 
5

 
 
 
 
 
 
Operating efficiency ratios:
 
 
 
 
 
 
 
 
 
 
 
Non-interest expense to average assets
2.09
%
 
2.07
%
 
 
 
2.13
%
 
2.25
%
 
 
Net overhead ratio (1)
1.27
%
 
1.26
%
 
 
 
1.32
%
 
1.39
%
 
 
Efficiency ratio (2)
52.51
%
 
53.02
%
 
 
 
53.59
%
 
56.55
%
 
 
(1) 
Computed as non-interest expense, less non-interest income, annualized, divided by average total assets.
(2) 
Computed as non-interest expense divided by the sum of net interest income on a tax equivalent basis and non-interest income. The efficiency ratio is presented on a tax-equivalent basis, assuming a federal income tax rate of 35%. See Table 29, "Non-U.S. GAAP Financial Measures," for a reconciliation of the effect of the tax-equivalent adjustment.
*
Less than 1%



66

Third quarter 2014 compared to third quarter 2013

Non-interest expense increased by $6.6 million, or 9%, for third quarter 2014 compared to third quarter 2013. The increase primarily reflects higher compensation expense, and loan and collection and marketing costs, along with an increase in the provision for unfunded commitments. This was partially offset by a decrease in net foreclosed property expense in third quarter 2014 compared to third quarter 2013.

Compensation expense increased $5.1 million, or 12%, over third quarter 2013, due to an increase in incentive compensation accruals tied to improved performance, the impact of annual salary adjustments and an increased number of employees. Share-based compensation expense increased $611,000 in connection with the full implementation of annual award programs which began in 2011. The year over year increase was partially offset by the lack of incentive compensation accruals in the current quarter that we included in the prior year period for our investment management subsidiary sold at year end.

Professional services expense, which includes fees paid for legal services in connection with corporate activities, accounting, and consulting services, increased $161,000, or 7%, from third quarter 2013, due to the increase in risk management and technology consulting services.

Net foreclosed property expense, which includes write-downs on foreclosed properties, gains and losses on sales of foreclosed properties, and property ownership costs associated with the maintenance of OREO, declined $2.8 million, or 63%, compared to third quarter 2013. The decrease was primarily due to a $4.2 million reduction in OREO write-downs, offset by net gains of $21,000 on $1.8 million of OREO sold in third quarter 2014, as compared to net gains of $1.8 million on $18.9 million of OREO sold in third quarter 2013. In addition, property ownership costs, such as property management and real estate taxes, were down $97,000 from the prior year quarter as the population of OREO had declined from $35.3 million at September 30, 2013 to $17.3 million at September 30, 2014. Refer to the "Foreclosed Real Estate" discussion in the "Loan Portfolio and Credit Quality" section below for more information regarding our OREO portfolio and valuation process.

Insurance expense increased $487,000, or 19%, from third quarter 2013 largely due to the FDIC deposit insurance assessment model being impacted by overall asset growth, increase in composition of certain loan classifications and changes in deposit mix as of September 30, 2014 compared to September 30, 2013.

Loan and collection expense, which consists primarily of certain non-reimbursable costs associated with loan origination and servicing activities and loan remediation costs, increased $754,000, or 56%, from third quarter 2013 due to increased appraisal costs of $306,000 and an increase in the mortgage origination expense due to greater mortgage loan volume.

Other expenses increased $1.7 million, or 62%, from third quarter 2013. Other expenses include bank charges, costs associated with the CDARS® product offering, intangible asset amortization, education-related costs, subscriptions, provision for unfunded commitments, and miscellaneous losses and expenses. The increase was primarily related to a $1.8 million change in the unfunded commitments provision as the prior year third quarter reflected a $1.3 million reversal in unfunded commitments related to a specific credit.

Our efficiency ratio was 52.5% for third quarter 2014, improving from 53.0% for third quarter 2013, reflecting revenue increasing at a higher percentage than expenses. We expect our efficiency ratio to remain in the mid-50 percent range as our revenues and expenses maintain this proportionate relationship. This would include investments in infrastructure and technology to support our overall growth.

Nine months ended September 30, 2014 compared to nine months ended September 30, 2013

Non-interest expense increased $1.6 million for the nine months ended September 30, 2014, compared to the prior year period, primarily related to an increase in compensation and professional services costs, offset by a decrease in net foreclosed property expense and certain non-recurring charges included in other expense for the nine months ended September 30, 2013.

Compensation expense increased overall by $11.1 million, or 9%, from the prior year period due to additional staff, annual salary adjustments and increased incentive compensation accruals based on improved performance. Share-based costs increased $2.1 million, or 22% reflecting full implementation of annual equity award programs which began in 2011. Incentive compensation and commissions increased $2.3 million from the prior period due to improved performance. Payroll taxes, insurance and retirement costs were up by $905,000, or 6%, compared to the nine months ended September 30, 2013 due to increased base compensation.

Net foreclosed property expenses declined $9.4 million, or 56%, compared to the prior year period. The decline in net foreclosed property expenses was primarily due to $11.1 million in lower OREO valuation write-downs compared to the prior year period.

67

In addition, property ownership costs were down $932,000 from the prior year period as the OREO portfolio declined $18.0 million from September 30, 2013. Finally, net losses on sales of OREO were $358,000 on properties with a net book value of $8.6 million for the nine months ended September 30, 2014, compared to net gains of $1.7 million on properties with a net book value of $40.9 million for the nine months ended September 30, 2013.

Insurance costs increased $1.1 million, or 13%, for the nine months ended September 30, 2014 compared to the prior year period and was primarily due to $960,000 in prior period refunds on previously paid FDIC deposit insurance assessments recorded in nine months ended September 30, 2013, and was partially offset by higher FDIC deposit insurance in 2014 due to overall asset growth, increase in certain loan classifications and a shift in our deposit mix.

Loan and collection expense decreased $1.7 million, or 26%, from the nine months ended September 30, 2014. The decrease was primarily due to lower costs related to a lower level of problem loans and reduced mortgage origination costs on a lower volume of refinance activity.

Other operating expenses declined $2.6 million, or 16%, for the nine months ended September 30, 2014 compared to the prior year period largely due to $3.0 million of non-recurring charges that were incurred during the first nine months of 2013 relating to restructuring costs and a charge on repurchased loans.

Income Taxes

Our provision for income taxes includes both federal and state income tax expense. For the quarter ended September 30, 2014, we recorded an income tax provision of $25.2 million on pre-tax income of $65.7 million (equal to a 38.3% effective tax rate) compared to an income tax provision of $21.2 million on pre-tax income of $54.2 million for the quarter ended September 30, 2013 (equal to a 39.0% effective tax rate).

For the nine months ended September 30, 2014, income tax expense totaled $72.2 million on pre-tax income of $188.1 million (equal to a 38.4% effective tax rate) compared to an income tax provision of $55.8 million on pre-tax income of $145.1 million for the nine months ended September 30, 2013 (equal to a 38.5% effective tax rate).

The decrease in our effective tax rate in the third quarter 2014 compared to the third quarter 2013 was due to various one-time tax charges in the third quarter 2013.

Net deferred tax assets totaled $98.3 million at September 30, 2014. We have concluded that it is more likely than not that the deferred tax assets will be realized and, accordingly, no valuation allowance was recorded during the quarter. This conclusion was based in part on the fact that the Company has cumulative book income for financial statement purposes at September 30, 2014, measured on a trailing three-year basis. In addition, we considered the Company's recent earnings history, on both a book and tax basis, and our outlook for earnings and taxable income in future periods.

For calendar year 2014, we currently expect the effective tax rate to be in the range of 38-39%, although a number of factors will continue to influence that estimate.

Operating Segments Results

We have three primary business segments: Banking, Asset Management, and Holding Company Activities.

Banking

Our Banking segment is the Company's most significant segment, representing 89% of consolidated total assets and generating nearly all of the Company's net income. The net income for the Banking segment for the quarter ended September 30, 2014 was $46.1 million, an increase of $7.2 million from net income of $38.9 million for the prior year period. The increase in net income for the Banking segment was primarily due to $11.0 million increase in net interest income due to 11% loan growth since the prior year period and $4.2 million decline in the provision for loan and covered loan losses compared to the prior year period, largely driven by improvements in credit quality metrics. In addition non-interest expenses increased $7.4 million, as compared to the prior year period, due to an increase in salaries and incentive compensation primarily driven by new hires, salary increases and an increase in incentive compensation accruals tied to improved performance.

Total loans for the Banking segment increased $903.6 million to $11.5 billion at September 30, 2014 from $10.6 billion at December 31, 2013. Total deposits, excluding deposits held-for-sale, were $12.9 billion and $12.1 billion at September 30, 2014 and December 31, 2013, respectively.

68


Asset Management

The Asset Management segment (formerly named Trust and Investments) includes investment management, personal trust and estate administration, custodial and escrow, retirement plans and brokerage services.

Net income from Asset Management declined to $554,000 for third quarter 2014 from $659,000 for the prior year period. The prior year period includes fees and costs generated by our investment management subsidiary, Lodestar, that we sold in December 2013, of which we retain $284.8 million of assets at September 30, 2014. The impact of the sale of Lodestar in fourth quarter 2013 was partially offset by an increase in fees driven by the increase in assets under management and administration ("AUMA"), which grew to $6.5 billion at September 30, 2014 from $5.7 billion at December 31, 2013 benefiting from growth in both managed and custody assets.

Holding Company Activities

The Holding Company Activities segment consists of parent company-only activity and intersegment eliminations. The Holding Company’s most significant asset is its investment in the Bank. Undistributed earnings relating to this investment is not included in the Holding Company financial results. Holding Company financial results are represented primarily by interest expense on borrowings and operating expenses. Recurring operating expenses consist primarily of compensation expense allocated to the Holding Company and professional fees. The Holding Company Activities segment reported a net loss of $6.1 million for the quarter ended September 30, 2014, compared to a net loss of $6.5 million for the prior year period. The Holding Company had $89.1 million in cash at September 30, 2014, compared to $55.9 million at December 31, 2013 and included the receipt of $50 million in dividends from the Bank during first quarter 2014.

On October 2, 2014, the Bank paid a $50 million dividend to the Holding Company. On October 8, 2014, the Holding Company redeemed $75.0 million of the $143.8 million in outstanding 10% Debentures. After the redemption, the Holding Company had $63.6 million in cash. Refer to Trust Preferred Securities and Long-term Debt Redemption - October 2014 discussion within the Third Quarter Overview of "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for further information on the redemption.

Additional information about our operating segments are also discussed in Note 17 of "Notes to Consolidated Financial Statements" in Item 1 of this Form 10-Q.

FINANCIAL CONDITION

Investment Securities Portfolio Management

We manage our investment securities portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity to attempt to serve as some protection of net interest income levels against the impact of changes in interest rates. Investments in the portfolio are comprised of debt securities, primarily residential mortgage-backed pools and state and municipal bonds.

We may adjust the size and composition of our securities portfolio according to a number of factors, including expected liquidity needs, the current and forecasted interest rate environment, our actual and anticipated balance sheet growth rate, the relative value of various segments of the securities markets, and the broader economic and regulatory environment.

Debt securities that are classified as available-for-sale are carried at fair value and may be sold as part of our asset/liability management strategy in response to changes in interest rates, liquidity needs or significant prepayment risk. Unrealized gains and losses on available-for-sale securities represent the difference between the aggregated cost and fair value of the portfolio and are reported, on an after-tax basis, as a separate component of equity in accumulated other comprehensive income ("AOCI"). This balance sheet component will fluctuate as current market interest rates and conditions change, with such changes affecting the aggregate fair value of the portfolio. In periods of significant market volatility we may experience significant changes in AOCI.

Debt securities that are classified as held-to-maturity are securities that we have the ability and intent to hold until maturity and are accounted for using historical cost, adjusted for amortization of premiums and accretion of discounts.


69

Table 6
Investment Securities Portfolio Valuation Summary
(Dollars in thousands)
 
 
As of September 30, 2014
 
As of December 31, 2013
 
Fair
Value
 
Amortized
Cost
 
% of
Total
 
Fair
Value
 
Amortized
Cost
 
% of
Total
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
168,352

 
$
170,568

 
6
 
$
142,575

 
$
145,716

 
6
U.S. Agency securities
45,935

 
47,073

 
2
 
45,528

 
47,409

 
2
Collateralized mortgage obligations
148,228

 
143,164

 
6
 
176,116

 
169,775

 
7
Residential mortgage-backed securities
859,438

 
839,837

 
33
 
963,107

 
946,656

 
38
State and municipal securities
319,301

 
311,724

 
12
 
274,650

 
271,135

 
11
Foreign sovereign debt
500

 
500

 
*
 
500

 
500

 
*
Total available-for-sale
1,541,754

 
1,512,866

 
59
 
1,602,476

 
1,581,191

 
64
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
59,478

 
62,162

 
2
 
64,072

 
67,335

 
3
Residential mortgage-backed securities
830,939

 
833,513

 
32
 
673,773

 
688,410

 
27
Commercial mortgage-backed securities
172,563

 
175,862

 
7
 
157,973

 
164,607

 
6
State and municipal securities
470

 
465

 
*
 
1,090

 
1,084

 
*
Total held-to-maturity
1,063,450

 
1,072,002

 
41
 
896,908

 
921,436

 
36
Total securities
$
2,605,204

 
$
2,584,868

 
100
 
$
2,499,384

 
$
2,502,627

 
100
*
Less than 1%

As of September 30, 2014, our securities portfolio totaled $2.6 billion, up slightly from $2.5 billion at December 31, 2013. During the nine months ended September 30, 2014, purchases of securities totaled $430.3 million, with $190.0 million in the available-for-sale portfolio and $240.3 million in the held-to-maturity portfolio. The current year purchases in the investment portfolio primarily represent the reinvestment of proceeds from sales, maturities and paydowns in largely similar agency-guaranteed residential mortgage-backed securities and state and municipal securities, as well as purchases of residential agency guaranteed mortgage-backed securities, state and municipal securities and U.S. Treasury securities.

In conjunction with ongoing portfolio management and rebalancing activities, during the nine months ended September 30, 2014, we sold $74.7 million in primarily residential mortgage-backed securities and U.S. Treasury securities, resulting in a net securities gain of $530,000.

Investments in collateralized mortgage obligations and residential and commercial mortgage-backed securities comprised 80% of the total portfolio at September 30, 2014. All of the mortgage-backed securities are backed by U.S. Government agencies or issued by U.S. Government-sponsored enterprises. All residential mortgage-backed securities are composed of fixed-rate, fully-amortizing collateral with final maturities of 30 years or less.

Investments in debt instruments of state and local municipalities comprised 12% of the total portfolio at September 30, 2014. This type of security has historically experienced very low default rates and provided a predictable cash flow since it generally is not subject to significant prepayment. Insurance companies regularly provide credit enhancement to improve the credit rating and liquidity of a municipal bond issuance. Management considers the credit enhancement and underlying municipality credit strength when evaluating a purchase or sale decision.

At September 30, 2014, our reported equity reflected unrealized net securities gains on available-for-sale securities, net of tax, of $17.6 million, an increase of $4.6 million from December 31, 2013 due to decreases in certain interest rates and the corresponding increase in the value of the security as a result. We continue to add, as needed, to the held-to-maturity portfolio to mitigate the potential future AOCI volatility of adding bonds to the available-for-sale portfolio in a low interest rate environment.


70

The following table summarizes activity in the Company's investment securities portfolio during 2014. There were no transfers of securities between investment categories during the year.

Table 7
Investment Portfolio Activity
(Dollars in thousands)
 
 
Quarter Ended
September 30, 2014
 
Nine Months Ended September 30, 2014
 
 
Available-for-Sale
 
Held-to-Maturity (1)
 
Available-for-Sale
 
Held-to-Maturity (1)
 
Balance at beginning of period
$
1,527,747

 
$
1,066,216

 
$
1,602,476

 
$
921,436

 
Additions:
 
 
 
 
 
 
 
 
Purchases
78,933

 
41,605

 
190,032

 
240,332

 
Reductions:
 
 
 
 
 
 
 
 
Sales proceeds
(1,041
)
 
—

 
(74,690
)
 
—

 
Net gains on sale
3

 
—

 
530

 
—

 
Principal maturities, prepayments and calls, net of gains
(54,350
)
 
(34,512
)
 
(176,823
)
 
(86,313
)
 
Amortization of premiums and accretion of discounts
(2,432
)
 
(1,307
)
 
(7,374
)
 
(3,453
)
 
Total reductions
(57,820
)
 
(35,819
)
 
(258,357
)
 
(89,766
)
 
(Decrease) increase in market value
(7,106
)
 
—

(1) 
7,603

 
—

(1) 
Balance at end of period
$
1,541,754

 
$
1,072,002

 
$
1,541,754

 
$
1,072,002

 
(1) 
The held-to-maturity portfolio is recorded at cost, with no adjustment for the $24.5 million unrealized loss in the portfolio at the beginning of 2014 or the decrease in market value of $6.3 million for the quarter ended September 30, 2014 or the increase of $16.0 million for the nine months ended September 30, 2014.


71

The following table presents the maturities of the different types of investments that we owned at September 30, 2014, and the corresponding interest rates.

Table 8
Maturity Distribution and Portfolio Yields
(Dollars in thousands)

 
As of September 30, 2014
 
One Year or Less
 
One Year to Five
Years
 
Five Years to Ten Years
 
After 10 years
 
Amortized
Cost
 
Yield to
Maturity
 
Amortized
Cost
 
Yield to
Maturity
 
Amortized
Cost
 
Yield to
Maturity
 
Amortized
Cost
 
Yield to
Maturity
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
—

 
—
%
 
$
170,568

 
1.06
%
 
$
—

 
—
%
 
$
—

 
—
%
U.S. Agency securities
—

 
—
%
 
32,144

 
1.27
%
 
14,929

 
1.35
%
 
—

 
—
%
Collateralized mortgage obligations (1)
6,797

 
4.85
%
 
136,367

 
3.20
%
 
—

 
—
%
 
—

 
—
%
Residential mortgage-backed securities (1)
12

 
5.05
%
 
627,953

 
3.29
%
 
211,032

 
2.12
%
 
840

 
7.63
%
State and municipal securities (2)
7,888

 
3.30
%
 
148,976

 
2.15
%
 
152,405

 
2.04
%
 
2,455

 
2.66
%
Foreign sovereign debt
500

 
1.51
%
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
Total available-for-sale
15,197

 
3.94
%
 
1,116,008

 
2.73
%
 
378,366

 
2.05
%
 
3,295

 
3.92
%
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations (1)
—

 
—
%
 
62,162

 
1.41
%
 
—

 
—
%
 
—

 
—
%
Residential mortgage-backed securities (1)
—

 
—
%
 
480,120

 
2.47
%
 
228,507

 
2.36
%
 
124,886

 
3.00
%
Commercial mortgage-backed securities (1)
—

 
—
%
 
110,444

 
1.57
%
 
65,418

 
2.22
%
 
—

 
—
%
State and municipal securities (2)
95

 
3.06
%
 
370

 
2.85
%
 
—

 
—
%
 
—

 
—
%
Total held-to-maturity
95

 
3.06
%
 
653,096

 
2.21
%
 
293,925

 
2.33
%
 
124,886

 
3.00
%
Total securities
$
15,292

 
3.93
%
 
$
1,769,104

 
2.54
%
 
$
672,291

 
2.17
%
 
$
128,181

 
3.02
%
(1) 
The repricing distributions and yields to maturity of collateralized mortgage obligations and mortgage-backed securities are based on average life of expected cash flows. Actual repricings and yields of the securities may differ from those reflected in the table depending upon actual interest rates and prepayment speeds.
(2) 
The maturity date of state and municipal bonds is based on contractual maturity, unless the bond, based on current market prices, is deemed to have a high probability that a call right will be exercised, in which case the call date is used as the maturity date.

LOAN PORTFOLIO AND CREDIT QUALITY (excluding covered assets)

The following discussion of our loan portfolio and credit quality excludes covered assets. Covered assets represent assets acquired through an FDIC-assisted transaction that are subject to a loss share agreement and are presented separately on the Consolidated Statements of Financial Condition. For additional discussion of covered assets, refer to "Covered Assets" further in "Management’s Discussion and Analysis" and Note 6 of "Notes to Consolidated Financial Statements."

Portfolio Composition

Total loans were $11.5 billion at September 30, 2014, compared to $10.6 billion at December 31, 2013. Loans grew by $903.6 million during the nine months ended September 30, 2014, with the growth primarily in commercial and industrial loans, which increased $773.6 million from year end 2013. New client activity of $1.2 billion and net increased borrowings from existing clients contributed to loan growth during the first nine months of 2014 and was primarily offset by payoffs. Our five-quarter trailing average loan growth is approximately $290.0 million at September 30, 2014, increasing $95.0 million, compared to $195.0 million a year ago. The growth rate is driven by a slowdown of payoffs in the legacy loan portfolio, which now makes up 6% of total loans at September 30, 2014, an increase in revolving line usage and greater quarterly new relationship growth. Commercial real estate loans increased $149.5 million from year end 2013, primarily due to construction projects being completed and reclassified

72

to commercial real estate in the third quarter of 2014, along with new client activity. Revolving line usage at September 30, 2014 was 48%, up two basis points from December 31, 2013 usage of 46%.

Our third quarter loan growth was strong despite the level of competition in our markets from both bank and nonbank competitors. Overall loan growth from quarter-to-quarter continues to be impacted by the heightened competition which is affecting borrowers' expectations regarding both pricing and structure. Our strategy is to maintain a disciplined approach to pricing and structuring new credit opportunities and to continue to develop comprehensive client relationships. Loan growth in the last quarter of the year can be uneven as clients position themselves for year end close and we would anticipate loan growth to be closer to our five-quarter trailing average. We remain selective and disciplined to structure, pricing and overall returns as we add and develop new client relationships.

Much of our recent loan growth has been focused in commercial and industrial, which represents 68% of our portfolio at September 30, 2014. Within the commercial and industrial portfolio, the healthcare portfolio increased $195.1 million and the manufacturing portfolio increased $177.4 million from December 31, 2013. The commercial and industrial portfolio generally provide us higher yields, principally in specialty lines such as healthcare and security alarm financing, than other segments of our loan portfolio and provide greater potential for cross-selling of other products and services.

In the normal course of our business, we are involved in loan participation and syndication transactions that include a number of banks, primarily to maintain and build client relationships with a view to cross-selling products and originating loans for the borrowers in the future. Although we may strive to lead or co-lead the arrangement, we will also participate with other banks when we have a relationship with the borrower. These transactions also allow us to decrease our credit exposure linked to individual client relationships or loan concentrations by industry, type or size. Of our $11.5 billion in total loans at September 30, 2014, we were party to $2.4 billion in shared national credits ("SNCs") which are transactions typically led by larger institutions. At September 30, 2014, total syndications and participations outstanding were $3.9 billion, including SNCs, and of this total, we were the lead or co-lead on transactions with $1.6 billion outstanding at quarter end.

The following table presents the composition of our loan portfolio at the dates shown.

Table 9
Loan Portfolio
(Dollars in thousands)
 
 
September 30,
2014
 
% of
Total
 
December 31,
2013
 
% of
Total
 
% Change in Balances
Commercial and industrial
$
6,112,715

 
53
 
$
5,457,574

 
51
 
12

Commercial – owner-occupied real estate
1,792,686

 
15
 
1,674,260

 
16
 
7

Total commercial
7,905,401

 
68
 
7,131,834

 
67
 
11

Commercial real estate
2,103,378

 
18
 
1,987,307

 
19
 
6

Commercial real estate – multi-family
546,641

 
5
 
513,194

 
5
 
7

Total commercial real estate
2,650,019

 
23
 
2,500,501

 
24
 
6

Construction
307,066

 
3
 
293,387

 
3
 
5

Total commercial real estate and construction
2,957,085

 
26
 
2,793,888

 
27
 
6

Residential real estate
343,573

 
3
 
341,868

 
3
 
*

Home equity
141,159

 
1
 
149,732

 
1
 
-6

Personal
200,369

 
2
 
226,699

 
2
 
-12

Total loans
$
11,547,587

 
100
 
$
10,644,021

 
100
 
8

* Less than 1%


73

The following table summarizes the composition of our commercial loan portfolio at September 30, 2014 and December 31, 2013. Our commercial loan portfolio is categorized in the table based on our most significant industry segments, as classified pursuant to the North American Industrial Classification System standard industry description. These categories are based on the nature of the client's ongoing business activity as opposed to the collateral underlying an individual loan. To the extent that a client's underlying business activity changes, classification differences between periods will arise.

Table 10
Commercial Loan Portfolio Composition by Industry Segment
(Dollars in thousands)
 
 
September 30, 2014
 
December 31, 2013
 
Amount
 
% of Total
 
Amount
 
% of Total
Manufacturing
$
1,761,121

 
22
 
$
1,583,679

 
22
Healthcare
1,848,662

 
23
 
1,653,596

 
23
Wholesale trade
714,170

 
9
 
695,049

 
10
Finance and insurance
783,309

 
10
 
643,119

 
9
Real estate, rental and leasing
504,957

 
7
 
444,210

 
6
Professional, scientific and technical services
457,200

 
6
 
454,373

 
7
Administrative, support, waste management and remediation services
504,842

 
7
 
449,777

 
6
Architecture, engineering and construction
270,073

 
3
 
249,444

 
4
Retail
254,188

 
3
 
223,541

 
3
All other (1)
806,879

 
10
 
735,046

 
10
Total commercial (2)
$
7,905,401

 
100
 
$
7,131,834

 
100
(1) 
All other consists of numerous smaller balances across a variety of industries with no category greater than 3% of total commercial loans.
(2) 
Includes owner-occupied commercial real estate of $1.8 billion at September 30, 2014 and $1.7 billion at December 31, 2013, respectively.

One of the largest segments within our commercial lending business is the healthcare industry. We have a specialized niche in the assisted living, skilled nursing, and residential care segment of the healthcare industry. Loan relationships to these providers tend to be larger extensions of credit with borrowers primarily represented by for-profit businesses. At September 30, 2014, 23% of the commercial loan portfolio and 16% of the total loan portfolio was composed of loans extended primarily to operators in this segment to finance the working capital needs and cost of facilities providing such services. The facilities securing the loans are dependent, in part, on the receipt of payments and reimbursements under government contracts for services provided. Our clients and their ability to service debt may be adversely impacted by the financial health of state or federal payors. In recent years, there have been reductions in the reimbursement rates in certain states and certain government entities are taking longer to reimburse. To date, despite some impact on client cash flows, the healthcare loan portfolio segment has experienced minimal defaults and losses.

Our manufacturing portfolio, representing 22% of our commercial and industrial lending business at September 30, 2014, is well diversified among sub-industry and product types with particular focus in serving clients in our primary market segments. The manufacturing industry segment is a key component of our core business strategy. As the general market environment for manufacturing has improved over the past several years, the manufacturing segment of the portfolio has been a key influence on the stabilizing credit performance in the commercial portfolio.

At September 30, 2014, approximately 10%, or $1.1 billion of our total loan portfolio was characterized as higher-risk (also referred to as leveraged loans) commercial and industrial loans, as defined for regulatory purposes, compared to 8% or $879.7 million as of December 31, 2013. Of the $257.4 million increase since year-end 2013, $153.4 million is due to new loans. Higher-risk commercial and industrial loans are primarily underwritten on the recurring earnings of the borrower that manifest elevated cash flow leverage metrics as defined by the FDIC in late 2012. Higher-risk commercial and industrial loans are spread across multiple industries, generally command higher loan yields as a premium for underwriting the additional risk due to their leveraged position, and typically have lower collateral coverage than similar commercial and industrial loans that are not classified as higher-risk. As a result, in the event of default, the loss potential may be greater for these types of loans versus similar commercial and industrial loans that are not classified as higher-risk.


74

The following table summarizes our commercial real estate and construction loan portfolios by collateral type at September 30, 2014 and December 31, 2013.

Table 11
Commercial Real Estate and Construction Loan Portfolios by Collateral Type
(Dollars in thousands)
 
 
September 30, 2014
 
December 31, 2013
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Commercial Real Estate
 
 
 
 
 
 
 
Land
$
175,311

 
6
 
$
216,176

 
9
Residential 1-4 family
80,960

 
3
 
103,568

 
4
Multi-family
546,641

 
21
 
513,194

 
20
Industrial/warehouse
250,481

 
9
 
271,230

 
11
Office
521,921

 
20
 
470,790

 
19
Retail
600,782

 
23
 
490,955

 
19
Healthcare
184,254

 
7
 
167,226

 
7
Mixed use/other
289,669

 
11
 
267,362

 
11
Total commercial real estate
$
2,650,019

 
100
 
$
2,500,501

 
100
Construction
 
 
 
 
 
 
 
Residential 1-4 family
$
24,967

 
8
 
$
20,960

 
7
Multi-family
81,163

 
26
 
58,131

 
20
Industrial/warehouse
25,772

 
8
 
29,343

 
10
Office
19,024

 
6
 
20,596

 
7
Retail
97,784

 
32
 
83,640

 
28
Healthcare
15,880

 
5
 
43,506

 
15
Mixed use/other
42,476

 
15
 
37,211

 
13
Total construction
$
307,066

 
100
 
$
293,387

 
100

Of the combined commercial real estate and construction portfolios, the three largest categories at September 30, 2014 were retail, multi-family, and office real estate, which represent 24%, 21% and 18%, respectively of the combined portfolios. Our commercial real estate and construction portfolio strategy is focused on achieving market share in core real estate classes in geographically diverse but key market segments. From an overall portfolio performance perspective, these assets continue to perform at a satisfactory level.

Within the commercial real estate portfolio, our exposure to land loans totaled $175.3 million at September 30, 2014, declining $40.9 million, or 19%, from $216.2 million at December 31, 2013. Land remains an illiquid asset class as buyers and sellers may hold divergent future development outlooks for the land, therefore affecting saleability and market prices. As a percentage of the commercial real estate portfolio, land loans were 6% at September 30, 2014 and 9% at December 31, 2013.

The construction portfolio totaled $307.1 million at September 30, 2014, an increase of $13.7 million, compared to $293.4 million at December 31, 2013 with the most significant increase in the multi-family category, somewhat offset by a sizeable decrease in healthcare as the loans were reclassified to commercial real estate at the expiration of the construction phase. The increase was driven by increased market activity as companies have additional capital to deploy, which has pushed values higher for properties in demand. Additionally, construction activity for retail, apartments and urban-infill continues to influence increased construction line utilization.



75

Maturity and Interest Rate Sensitivity of Loan Portfolio

The following table summarizes the maturity distribution of our loan portfolio as of September 30, 2014, by category, as well as the interest rate sensitivity of loans in these categories that have maturities in excess of one year.

Table 12
Maturities and Sensitivities of Loans to Changes in Interest Rates (1) 
(Amounts in thousands)
 
 
As of September 30, 2014
 
Due in 1 year or less
 
Due after 1 year through 5 years
 
Due after 5 years
 
Total
Commercial
$
2,066,800

 
$
5,656,362

 
$
182,239

 
$
7,905,401

Commercial real estate
803,216

 
1,667,731

 
179,072

 
2,650,019

Construction
47,711

 
255,117

 
4,238

 
307,066

Residential real estate
14,677

 
3,086

 
325,810

 
343,573

Home equity
23,422

 
63,673

 
54,064

 
141,159

Personal
127,430

 
71,974

 
965

 
200,369

Total
$
3,083,256

 
$
7,717,943

 
$
746,388

 
$
11,547,587

Loans maturing after one year:
 
 
 
 
 
 
 
Predetermined (fixed) interest rates
 
 
$
187,273

 
$
169,991

 
 
Floating interest rates
 
 
7,530,670

 
576,397

 
 
Total
 
 
$
7,717,943

 
$
746,388

 
 
(1) 
Maturities are based on contractual maturity date. Actual timing of repayment may differ from those reflected in the table as clients may choose to pre-pay their outstanding balance prior to the contractual maturity date.

Of the $8.1 billion in loans maturing after one year with a floating interest rate, $1.4 billion are subject to interest rate floors, of which $1.3 billion have such floors in effect at September 30, 2014. For further analysis and information related to interest sensitivity, see Item 3 "Quantitative and Qualitative Disclosures about Market Risk" of this Form 10-Q.

Delinquent Loans, Special Mention and Potential Problem Loans, Restructured Loans and Nonperforming Assets

Loans are reported delinquent if the required principal and interest payments have not been received within 30 days of the date such payments are due. Delinquency can be driven by either failure of the borrower to make payments within the term of the loan or failure to make the final payment at maturity. The majority of our loans are not fully amortizing over the term. As a result, a sizeable final repayment is often required at maturity. If a borrower lacks refinancing options or the ability to pay, the loan may become delinquent in connection with its maturity.

Loans considered special mention are performing in accordance with the contractual terms but demonstrate potential weakness that if left unresolved, may result in deterioration in the Company’s credit position and/or the repayment prospects for the credit. Borrowers rated special mention may exhibit adverse operating trends, high leverage, tight liquidity, or other credit concerns. These loans continue to accrue interest.

Potential problem loans, like special mention, are loans that are performing in accordance with contractual terms, but for which management has some level of concern (greater than that of special mention loans) about the ability of the borrowers to meet existing repayment terms in future periods. These loans continue to accrue interest but the ultimate collection of these loans in full is questionable due to the same conditions that characterize a special mention credit. These credits may also have somewhat increased risk profiles as a result of the current net worth and/or paying capacity of the obligor or guarantors or the collateral pledged. These loans generally have a well-defined weakness that may jeopardize collection of the debt and are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not resolved. Although potential problem loans require additional attention by management, they may never become nonperforming.

Special mention and potential problem loans as of September 30, 2014 and December 31, 2013 are presented in Tables 13 and 17.


76

Nonperforming assets include nonperforming loans and real estate that has been acquired primarily through foreclosure proceedings and are awaiting disposition and are presented in Table 13. Nonperforming loans consist of nonaccrual loans, including restructured loans that remain on nonaccrual. We specifically exclude restructured loans that accrue interest from our definition of nonperforming loans.

All loans are placed on nonaccrual status when principal or interest payments become 90 days past due or earlier if management deems the collectability of the principal or interest to be in question prior to the loans becoming 90 days past due. When interest accruals are discontinued, accrued but uncollected interest is reversed, reducing interest income. Subsequent receipts on nonaccrual loans are recorded in the financial statements as a reduction of principal, and interest income is only recorded on a cash basis if the remaining recorded investment after charge-offs is deemed fully collectible. Classification of a loan as nonaccrual does not necessarily preclude the ultimate collection of loan principal and/or interest. Nonperforming loans are presented in Tables 13, 14, 15, and 17. Restructured loans that are accruing interest are also included in Table 13 and 16.

As part of our ongoing risk management practices and in certain circumstances, we may extend or modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties. The modification may consist of reduction in interest rate, extension of the maturity date, reduction in the principal balance, or other action intended to minimize potential losses and maximize our chances of a more successful recovery on a troubled loan. When we make such concessions as part of a modification, we report the loan as a TDR and account for the interest due in accordance with our TDR policy. Restructured loans can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the individual facts and circumstances of the borrower. The TDR is classified as an accruing TDR if the borrower has demonstrated the ability to meet the new terms of the restructuring as evidenced by a minimum of six months of performance in compliance with the restructured terms or if the borrower's performance prior to the restructuring or other significant events at the time of the restructuring supports returning or maintaining the loan on accrual status. TDRs accrue interest as long as the borrower complies with the revised terms and conditions and management is reasonably assured as to the collectability of principal and interest; otherwise, the restructured loan will be classified as nonaccrual. The TDR classification is removed when the loan is either fully repaid or is re-underwritten at market terms and an evaluation of the loan determines that it does not meet the definition of a TDR under current accounting guidance (i.e., the new terms do not represent a concession, the borrower is no longer experiencing financial difficulty, and the re-underwriting is executed at current market terms for new debt with similar risk). The composition of our restructured loans by loan category and current period activity for restructured loans accruing interest are presented in Tables 13 and 16.

Foreclosed real estate ("OREO") represents properties acquired as the result of borrower defaults on loans secured by a mortgage on real property. Refer to the following "Foreclosed Real Estate" section for additional discussion regarding our OREO assets.

As a result of our focused efforts in improving asset quality, we have seen a majority of our nonperforming asset credit quality metrics hit their lowest levels since 2008 and begin to largely level off. Nonperforming assets declined 26% from the prior year end to $90.7 million at September 30, 2014 and declined 39% from September 30, 2013. The improvement in nonperforming assets was largely attributable to paydowns, payoffs and sales. Nonperforming assets as a percentage of total assets were 0.60% at September 30, 2014, down from 0.87% at December 31, 2013.

OREO declined $11.3 million, or 39%, to $17.3 million from $28.5 million at December 31, 2013, as inflows to OREO were more than offset by sales of OREO and valuation adjustments as we continue to dispose and settle these properties. Refer to "Foreclosed Real Estate" below for further discussion on OREO.

Nonperforming loans totaled $73.4 million at September 30, 2014, down 22% from $94.2 million at December 31, 2013 and down 35% from September 30, 2013. Nonperforming loan inflows which are primarily comprised of potential problem loans moving through the workout process (i.e., moving from potential problem to nonperforming status) have steadily declined nearly every quarter since second quarter 2010, troughed in first quarter 2014 at $14.9 million and increased slightly by $440,000 to $16.8 million in third quarter 2014 from the second quarter 2014. As shown in Table 14, third quarter 2014 nonperforming loan inflows were more than offset by paydowns, payoffs, dispositions, and charge-offs. As shown in Table 15, which provides the nonperforming loan stratification by size, five nonperforming loans in excess of $3.0 million comprised 39% of our total nonperforming loans at September 30, 2014. Nonperforming loans as a percent of total loans was 0.64% at September 30, 2014, down from 0.89% at December 31, 2013 and 1.09% at September 30, 2013.

During the nine months ended September 30, 2014, we disposed of $35.4 million in problem assets, including $26.8 million in nonperforming loans, and $8.6 million in OREO. Problem loans (which include special mention, potential problem, and nonperforming loans) were $269.8 million at September 30, 2014, compared to $267.3 million at December 31, 2013. Because our loan portfolio contains loans that may be larger in size in order to accommodate the financing needs of some of our borrowers, changes in the performance of larger credits could create volatility and fluctuations in our credit quality metrics, including nonperforming loans, special mention and problem loans, and accruing TDR loans.

77


Accruing TDRs totaled $22.1 million at September 30, 2014, increasing $2.0 million, or 10%, from $20.2 million at December 31, 2013. As presented in the accruing TDR rollforward at Table 16, new accruing TDRs totaling $31.6 million were largely offset by $28.7 million in payoffs and paydowns during the nine months ended September 30, 2014.

The following table provides a comparison of our nonperforming assets, restructured loans accruing interest, special mention, potential problem and past due loans for the past five periods.

Table 13
Nonperforming Assets and Restructured and Past Due Loans
(Dollars in thousands)
 
2014
 
2013
 
September 30
 
June 30
 
March 31
 
December 31
 
September 30
Nonaccrual loans:
 
 
 
 
 
 
 
 
 
Commercial
$
33,348

 
$
34,522

 
$
31,074

 
$
24,779

 
$
26,881

Commercial real estate
19,079

 
21,953

 
40,928

 
46,953

 
62,954

Residential real estate
9,723

 
9,337

 
9,354

 
9,976

 
11,237

Personal and home equity
11,279

 
10,777

 
12,471

 
12,530

 
12,214

Total nonaccrual loans
73,429

 
76,589

 
93,827

 
94,238

 
113,286

90 days past due loans (still accruing interest)
—

 
—

 
—

 
—

 
—

Total nonperforming loans
73,429

 
76,589

 
93,827

 
94,238

 
113,286

OREO
17,293

 
19,823

 
23,565

 
28,548

 
35,310

Total nonperforming assets
$
90,722

 
$
96,412

 
$
117,392

 
$
122,786

 
$
148,596

Nonaccrual troubled debt restructured loans (included in nonaccrual loans):
 
 
 
 
 
 
 
 
 
Commercial
$
17,746

 
$
6,046

 
$
6,346

 
$
6,188

 
$
13,342

Commercial real estate
8,103

 
8,403

 
15,452

 
19,309

 
13,540

Residential real estate
1,512

 
1,534

 
2,671

 
2,239

 
2,546

Personal and home equity
5,467

 
5,033

 
4,433

 
4,446

 
4,511

Total nonaccrual troubled debt restructured loans
$
32,828

 
$
21,016

 
$
28,902

 
$
32,182

 
$
33,939

Restructured loans accruing interest:
 
 
 
 
 
 
 
 
 
Commercial
$
19,901

 
$
30,329

 
$
23,626

 
$
17,034

 
$
30,079

Commercial real estate
807

 
1,220

 
1,252

 
1,551

 
665

Personal and home equity
1,428

 
1,433

 
1,584

 
1,591

 
1,599

Total restructured loans accruing interest
$
22,136

 
$
32,982

 
$
26,462

 
$
20,176

 
$
32,343

Special mention loans
$
76,611

 
$
119,878

 
$
87,329

 
$
71,257

 
$
67,518

Potential problem loans
$
119,770

 
$
125,033

 
$
106,474

 
$
101,772

 
$
101,324

30-89 days past due loans
$
3,457

 
$
3,683

 
$
13,088

 
$
8,870

 
$
6,602

Nonperforming loans to total loans
0.64
%
 
0.69
%
 
0.86
%
 
0.89
%
 
1.09
%
Nonperforming loans to total assets
0.48
%
 
0.52
%
 
0.66
%
 
0.67
%
 
0.82
%
Nonperforming assets to total assets
0.60
%
 
0.66
%
 
0.82
%
 
0.87
%
 
1.07
%
Allowance for loan losses as a percent of nonperforming loans
204
%
 
191
%
 
156
%
 
152
%
 
128
%

78

The following table presents changes in our nonperforming loans for the past five periods.

Table 14
Nonperforming Loans Rollforward
(Amounts in thousands)
 
 
Quarters Ended
 
2014
 
2013
 
September 30
 
June 30
 
March 31
 
December 31
 
September 30
Nonperforming loans:
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
76,589

 
$
93,827

 
$
94,238

 
$
113,286

 
$
121,759

Additions:
 
 
 
 
 
 
 
 
 
New nonaccrual loans (1)
16,767

 
16,327

 
14,882

 
20,082

 
25,642

Reductions:
 
 
 
 
 
 
 
 
 
Return to performing status
—

 
—

 
(119
)
 
(370
)
 
—

Paydowns and payoffs, net of advances
(16,371
)
 
(19,936
)
 
(3,326
)
 
(16,464
)
 
(12,205
)
Net sales
(1,053
)
 
(7,875
)
 
(6,327
)
 
(4,438
)
 
(1,119
)
Transfer to OREO
(776
)
 
(1,111
)
 
(689
)
 
(6,642
)
 
(1,036
)
Transfer to loans held-for-sale
—

 
—

 
—

 
—

 
(7,359
)
Charge-offs
(1,727
)
 
(4,643
)
 
(4,832
)
 
(11,216
)
 
(12,396
)
Total reductions
(19,927
)
 
(33,565
)
 
(15,293
)
 
(39,130
)
 
(34,115
)
Balance at end of period
$
73,429

 
$
76,589

 
$
93,827

 
$
94,238

 
$
113,286

Nonaccruing troubled debt restructured loans (included in nonperforming loans):
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
21,016

 
$
28,902

 
$
32,182

 
$
33,939

 
$
37,673

Additions:
 
 
 
 
 
 
 
 
 
New nonaccrual troubled debt restructured loans (1)
17,662

 
2,098

 
1,820

 
11,322

 
1,630

Reductions:
 
 
 
 
 
 
 
 
 
Paydowns and payoffs, net of advances
(5,721
)
 
(8,211
)
 
(1,483
)
 
(8,232
)
 
(1,295
)
Net sales
—

 
(1,100
)
 
(3,356
)
 
—

 
(725
)
Transfer to OREO
—

 
(552
)
 
—

 
—

 
—

Charge-offs
(129
)
 
(121
)
 
(261
)
 
(4,847
)
 
(3,344
)
Total reductions
(5,850
)
 
(9,984
)
 
(5,100
)
 
(13,079
)
 
(5,364
)
Balance at end of period
$
32,828

 
$
21,016

 
$
28,902

 
$
32,182

 
$
33,939

(1) 
Amounts represent loan balances as of the end of the month in which loans were classified as new nonaccrual loans.


79

The following table presents the stratification by carrying amount of our nonperforming loans as of September 30, 2014 and December 31, 2013.

Table 15
Nonperforming Loans Stratification
(Dollars in thousands)

 
Stratification
 
$10.0 Million
or More
 
$5.0 Million to $9.9 Million
 
$3.0 Million to
$4.9 Million
 
$1.5 Million to
$2.9 Million
 
Under $1.5
Million
 
Total
As of September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Nonperforming loans:
 
 
 
 
 
 
 
 
 
 
 
Amount:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
10,956

 
$
5,552

 
$
3,756

 
$
5,750

 
$
7,334

 
$
33,348

Commercial real estate
—

 
—

 
3,838

 
3,817

 
11,424

 
19,079

Residential real estate
—

 
—

 
4,438

 
—

 
5,285

 
9,723

Personal and home equity
—

 
—

 
—

 
—

 
11,279

 
11,279

Total nonperforming loans
$
10,956

 
$
5,552

 
$
12,032

 
$
9,567

 
$
35,322

 
$
73,429

Number of Borrowers:
 
 
 
 
 
 
 
 
 
 
 
Commercial
1

 
1

 
1

 
3

 
24

 
30

Commercial real estate
—

 
—

 
1

 
2

 
23

 
26

Residential real estate
—

 
—

 
1

 
—

 
35

 
36

Personal and home equity
—

 
—

 
—

 
—

 
52

 
52

Total
1

 
1

 
3

 
5

 
134

 
144

Nonaccruing restructured loans (included in nonperforming loans):
 
 
 
 
 
 
 
 
 
 
 
Amount:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
10,956

 
$
—

 
$
3,756

 
$
1,515

 
$
1,519

 
$
17,746

Commercial real estate
—

 
—

 
—

 
2,018

 
6,085

 
8,103

Residential real estate
—

 
—

 
—

 
—

 
1,512

 
1,512

Personal and home equity
—

 
—

 
—

 
—

 
5,467

 
5,467

Total nonaccruing restructured loans
$
10,956

 
$
—

 
$
3,756

 
$
3,533

 
$
14,583

 
$
32,828

Number of Borrowers:
 
 
 
 
 
 
 
 
 
 
 
Commercial
1

 
—

 
1

 
1

 
10

 
13

Commercial real estate
—

 
—

 
—

 
1

 
11

 
12

Residential real estate
—

 
—

 
—

 
—

 
9

 
9

Personal and home equity
—

 
—

 
—

 
—

 
24

 
24

Total
1

 
—

 
1

 
2

 
54

 
58



80

Nonperforming Loans Stratification (Continued)
(Dollars in thousands)

 
Stratification
 
$5.0 Million to $9.9 Million
 
$3.0 Million to
$4.9 Million
 
$1.5 Million to
$2.9 Million
 
Under $1.5
Million
 
Total
As of December 31, 2013
 
 
 
 
 
 
 
 
 
Nonperforming loans:
 
 
 
 
 
 
 
 
 
Amount:
 
 
 
 
 
 
 
 
 
Commercial
$
9,393

 
$
3,749

 
$
5,150

 
$
6,487

 
$
24,779

Commercial real estate
15,440

 
9,035

 
7,583

 
14,895

 
46,953

Residential real estate
—

 
3,438

 
—

 
6,538

 
9,976

Personal and home equity
—

 
—

 
—

 
12,530

 
12,530

Total nonperforming loans
$
24,833

 
$
16,222

 
$
12,733

 
$
40,450

 
$
94,238

Number of Borrowers:
 
 
 
 
 
 
 
 
 
Commercial
1

 
1

 
2

 
23

 
27

Commercial real estate
2

 
2

 
4

 
26

 
34

Residential real estate
—

 
1

 
—

 
30

 
31

Personal and home equity
—

 
—

 
—

 
46

 
46

Total
3

 
4

 
6

 
125

 
138

Nonaccruing restructured loans (included in nonperforming loans):
 
 
 
 
 
 
 
 
 
Amount:
 
 
 
 
 
 
 
 
 
Commercial
$
—

 
$
—

 
$
5,150

 
$
1,038

 
$
6,188

Commercial real estate
9,754

 
—

 
4,299

 
5,256

 
19,309

Residential real estate
—

 
—

 
—

 
2,239

 
2,239

Personal and home equity
—

 
—

 
—

 
4,446

 
4,446

Total nonaccruing restructured loans
$
9,754

 
$
—

 
$
9,449

 
$
12,979

 
$
32,182

Number of Borrowers:
 
 
 
 
 
 
 
 
 
Commercial
—

 
—

 
2

 
6

 
8

Commercial real estate
1

 
—

 
2

 
12

 
15

Residential real estate
—

 
—

 
—

 
9

 
9

Personal and home equity
—

 
—

 
—

 
19

 
19

Total
1

 
—

 
4

 
46

 
51



81

The following table presents changes in our restructured loans accruing interest for the past five periods.

Table 16
Restructured Loans Accruing Interest Rollforward
(Amounts in thousands)

 
Quarters Ended
 
2014
 
2013
 
September 30
 
June 30
 
March 31
 
December 31
 
September 30
Balance at beginning of period
$
32,982

 
$
26,462

 
$
20,176

 
$
32,343

 
$
48,281

Additions:
 
 
 
 
 
 
 
 
 
New restructured loans accruing interest (1)
13,738

 
7,249

 
10,621

 
950

 
1,408

Restructured loans returned to accruing status
—

 
—

 
—

 
243

 
—

Reductions:
 
 
 
 
 
 
 
 
 
Paydowns and payoffs, net of advances
(24,584
)
 
(487
)
 
(3,636
)
 
(13,211
)
 
(15,368
)
Transferred to nonperforming loans
—

 
—

 
(699
)
 
(149
)
 
—

Removal of restructured loan status (2)
—

 
(242
)
 
—

 
—

 
(1,978
)
Balance at end of period
$
22,136

 
$
32,982

 
$
26,462

 
$
20,176

 
$
32,343

(1) 
Amounts represent loan balances as of the end of the month in which loans were classified as new restructured loans accruing interest.
(2) 
For the five quarters presented, the Company re-underwrote two loans totaling $2.2 million that, at the time of re-underwriting, were at market term and an evaluation of the loans determined that they did not meet the definition of a TDR under current accounting guidance because the loans qualified as pass-rated credits due to the strengthened financial condition of the borrowers. All of the loans were re-underwritten in conjunction with the loan maturity. None of the loans had principal or interest forgiveness at the time the loans were originally classified as a TDR.


82

The following table presents the credit quality of our loan portfolio as of September 30, 2014 and December 31, 2013.

Table 17
Credit Quality
(Dollars in thousands)

 
Special
Mention
 
% of
Portfolio
Loan
Type
 
 
Potential
Problem
Loans
 
% of
Portfolio
Loan
Type
 
 
Non-
Performing
Loans
 
% of
Portfolio
Loan
Type
 
 
Total Loans
As of September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
69,385

 
0.9
 
 
$
110,703

 
1.4
 
 
$
33,348

 
0.4
 
 
$
7,905,401

Commercial real estate
3,393

 
0.1
 
 
433

 
*
 
 
19,079

 
0.7
 
 
2,650,019

Construction
—

 
—
 
 
—

 
—
 
 
—

 
—
 
 
307,066

Residential real estate
2,696

 
0.8
 
 
6,496

 
1.9
 
 
9,723

 
2.8
 
 
343,573

Home equity
977

 
0.7
 
 
2,100

 
1.5
 
 
10,735

 
7.6
 
 
141,159

Personal
160

 
0.1
 
 
38

 
*
 
 
544

 
0.3
 
 
200,369

Total
$
76,611

 
0.7
 
 
$
119,770

 
1.0
 
 
$
73,429

 
0.6
 
 
$
11,547,587

As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
62,272

 
0.9
 
 
$
87,391

 
1.2
 
 
$
24,779

 
0.3
 
 
$
7,131,834

Commercial real estate
1,016

 
*
 
 
4,489

 
0.2
 
 
46,953

 
1.9
 
 
2,500,501

Construction
—

 
—
 
 
—

 
—
 
 
—

 
—
 
 
293,387

Residential real estate
4,898

 
1.4
 
 
7,177

 
2.1
 
 
9,976

 
2.9
 
 
341,868

Home equity
2,884

 
1.9
 
 
2,538

 
1.7
 
 
11,879

 
7.9
 
 
149,732

Personal
187

 
0.1
 
 
177

 
0.1
 
 
651

 
0.3
 
 
226,699

Total
$
71,257

 
0.7
 
 
$
101,772

 
1.0
 
 
$
94,238

 
0.9
 
 
$
10,644,021

*
Less than 0.1%

Foreclosed Real Estate

OREO represents property acquired as the result of borrower defaults on loans secured by a mortgage on real property. At foreclosure, OREO is recorded at fair value less estimated selling costs, which establishes a new cost basis. Subsequent to foreclosure, OREO is evaluated on a periodic basis and reported at fair value less estimated costs to sell, not to exceed the new cost basis, by current appraisals, as well as the review of comparable sales and other estimates of fair value obtained principally from independent sources, changes in absorption rates or market conditions from the time of the latest appraisal received or previous re-evaluation performed, and anticipated sales values considering management's plans for disposition. Write-downs are recorded for subsequent declines in fair value less estimated selling costs and are included in non-interest expense along with other expenses related to maintaining the properties.


83

Table 18 presents a rollforward of OREO for the quarters and nine months ended September 30, 2014 and 2013 and Table 19 presents the composition of OREO properties by categories at September 30, 2014 and December 31, 2013.

Table 18
OREO Rollforward
(Amounts in thousands)

 
Quarter Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
19,823

 
$
57,134

 
$
28,548

 
$
81,880

New foreclosed properties
776

 
1,036

 
2,576

 
10,668

Valuation adjustments
(1,545
)
 
(5,734
)
 
(5,260
)
 
(16,320
)
Disposals:
 
 
 
 
 
 
 
Sale proceeds
(1,782
)
 
(18,902
)
 
(8,213
)
 
(42,646
)
Net gain (loss) on sale
21

 
1,776

 
(358
)
 
1,728

Balance at end of period
$
17,293

 
$
35,310

 
$
17,293

 
$
35,310


Table 19
OREO Properties by Type
(Dollars in thousands)

 
September 30, 2014
 
December 31, 2013
 
Number
of Properties
 
Amount
 
% of
Total
 
Number
of Properties
 
Amount
 
% of
Total
Single-family homes
12

 
$
2,306

 
13
 
12

 
$
3,405

 
12
Land parcels
136

 
9,627

 
56
 
142

 
12,710

 
44
Multi-family
1

 
299

 
2
 
1

 
175

 
1
Office/industrial
7

 
4,710

 
27
 
20

 
11,301

 
40
Retail
1

 
351

 
2
 
1

 
957

 
3
Total OREO properties
157

 
$
17,293

 
100
 
176

 
$
28,548

 
100

OREO totaled $17.3 million at September 30, 2014, down 39% from $28.5 million at December 31, 2013. During the third quarter 2014, inflows into OREO of $776,000 were more than offset by OREO sales as we continue to dispose and settle these properties. Valuation adjustments on OREO for the third quarter 2014 were $1.5 million, down $4.2 million from third quarter 2013. At September 30, 2014, OREO land parcels, which continues to be a fairly illiquid asset class, represented the largest portion of OREO at 56%. Office/industrial properties, the next largest OREO asset class, represented 27% of the total OREO.

During the third quarter 2014, OREO sales totaled $1.8 million, with approximately 75% of these sales represented by office/industrial properties at approximated book value. Our ability to sell commercial property that we acquire through foreclosure in a cost effective and timely manner is dependent on a number of factors including but not limited to, valuations, buyer interest, market liquidity, the pace and timing of the overall recovery of the economy, activity levels in the real estate market and real estate inventory coming into the market for sale. Gains or losses as a percent of net book value on sales of OREO property may fluctuate in future quarters should we alter our approach on individual or larger group dispositions of properties based on individual property characteristics or relevant market factors as part of our overall strategy to maximize economic recovery from OREO. Valuation adjustments may also fluctuate based on market pricing and stability.

Credit Quality Management and Allowance for Loan Losses

We maintain an allowance for loan losses at a level management believes is sufficient to absorb credit losses inherent in the loan portfolio. The allowance for loan losses is assessed quarterly and represents an accounting estimate of probable losses in the portfolio at each balance sheet date based on a review of available and relevant information at that time. The allowance is not a prediction of our actual credit losses going forward. The allowance contains provisions for probable losses that have been identified

84

relating to specific borrowing relationships that are considered to be impaired (the "specific component" of the allowance), as well as probable losses inherent in the loan portfolio that are not specifically identified (the "general allocated component" of the allowance), which is determined using a methodology that is a function of quantitative and qualitative factors and management judgment applied to defined segments of our loan portfolio.

The specific component of the allowance relates to impaired loans. Impaired loans consist of nonaccrual loans (which include nonaccrual troubled debt restructurings ("TDRs")) and loans classified as accruing TDRs. A loan is considered impaired when, based on current information and events, either (i) management believes that it is probable that we will be unable to collect all amounts due (both principal and interest) according to the original contractual terms of the loan agreement, or (ii) it has been classified as a TDR. Once a loan is determined to be impaired, the amount of impairment is measured based on the loan’s observable fair value, the fair value of the underlying collateral less selling costs if the loan is collateral-dependent, or the present value of expected future cash flows discounted at the loan’s effective interest rate. Impaired loans exceeding $500,000 are evaluated individually while smaller loans are evaluated as pools using historical loss experience as well as management’s loss expectations for the respective asset class and product type. If the estimated fair value of the impaired loan is less than the recorded investment in the loan (including accrued interest, net of deferred loan fees and costs and unamortized premium or discount), impairment is recognized by creating a specific reserve as a component of the allowance for loan losses. The recognition of any reserve required on new impaired loans is recorded in the same quarter in which the transfer of the loan to nonaccrual status occurred. All loans that are over 90 days past due in principal or interest are placed on nonaccrual status. Management may also place some loans on nonaccrual status before they are 90 days past due if they meet the above definition of "nonaccrual." All impaired loans are reviewed quarterly for any changes that would affect the specific reserve. Any impaired loan in which a determination has been made that the economic value is permanently reduced is charged-off against the allowance for loan losses to reflect its current economic value in the period in which the determination has been made.

At the time a collateral-dependent loan is initially determined to be impaired, we review the existing collateral appraisal. If the most recent appraisal is greater than one-year old, a new appraisal is obtained on the underlying collateral. The Company generally obtains "as is" appraisal values for use in the evaluation of collateral-dependent impaired loans. Appraisals for collateral-dependent impaired loans in excess of $500,000 are updated with new independent appraisals at least annually and are formally reviewed by our internal appraisal department. Additional diligence is also performed at the six-month interval between annual appraisals. If during the course of the six-month review process there is evidence supporting a meaningful decline in the value of collateral, the appraised value is either internally adjusted downward or a new appraisal is required to support the value of the impaired loan.

In addition to the appraisal, both borrower and market-specific factors are taken into consideration, which may result in obtaining more frequent appraisal updates or internal assessments. Appraisals are conducted by third-party independent appraisers under internal direction and engagement. Appraisals are either reviewed internally by our appraisal department or are sent to an outside firm if appropriate. Both levels of review involve a scope appropriate for the complexity and risk associated with the loan and its collateral. As part of our internal review process, we consider other factors or recent developments that could adjust the valuations indicated in the appraisals or internal reviews. To validate the reasonableness of the appraisals obtained, we may consider many factors, including a comparison of the appraised value to the actual sales price of similar properties, relevant comparable sale price listings, broker opinions, and local or regional real estate valuation and sales data.

As of September 30, 2014, the average appraisal age used in the impaired loan valuation process was approximately 195 days. The amount of impaired assets which, by policy, requires an independent appraisal, but does not have a current external appraisal at September 30, 2014 due to the timing of the receipt of the appraisal is not material. In situations such as this, we perform an internal assessment to determine if a probable impairment reserve is required for the account based on our experience in the related asset class and type.

The general allocated component of the allowance is determined using a methodology that is a function of quantitative and qualitative factors applied to segments of our loan portfolio. The methodology takes into account at a product level originating line of business (transformational or legacy), year of origination, the risk-rating migration of the loans, and historical default and loss history of similar products. Using this information, the methodology produces credit metrics which provide a range of possible reserve amounts by product type. Use of the loss emergence period information by product type provides an important reference point for determining the appropriate range of reserves for a specific product category. We consider the appropriate balance of the general allocated component of the reserve within these ranges based on a variety of internal and external quantitative and qualitative factors to reflect data or timeframes not captured by the model as well as market and economic data, estimate of the loss emergence period and management judgment. We consider relevant factors related to individual product types and will also consider, when appropriate, changes in lending practices, changes in business or economic conditions, changes in the nature and volume of loans, changes in staffing or management, changes in the quality of our results from loan reviews, changes in collateral values, concentration risks, and other external factors such as legal or regulatory matters relevant to management’s assessment of required

85

reserve levels. In certain instances, these additional factors and judgments may lead to management’s conclusion that the appropriate level of the reserve is outside the range determined through the quantitative framework with respect to a given product type.

The Bank has limited exposure with a related junior collateral position in any product type with the exception of home equity lines of credit ("HELOCs"). This product is by definition usually secured in the junior position to the first mortgage on the related property. The Bank evaluates the allowance for loan losses for HELOCs as one of our six primary, segregated product types and considers the potential impact of the junior security position (as opposed to our generally senior position in all other product types) in setting final allocated reserve amounts for this product. Our allowance reflects the performance and loss history unique to our portfolio.

In our evaluation of the quantitatively-determined range and the adequacy of the allowance at September 30, 2014, we considered a number of factors for each product that included, but were not limited to, the following:

•
for the commercial portfolio, the pace of growth in the commercial loan sector, portfolio credit performance, impact of competition on loan structures, the existence of larger individual credits and specialized industry concentrations, comparison of our default rates to overall U.S. industry averages at industry subsets, default emergence from recent years compared to historical stressed periods, the loss emergence period, results of "back testing" of model results versus actual recent charge-off history, recent rating migrations into problem loan categories and other portfolio trends, as well as general macroeconomic indicators, such as GDP, employment trends and manufacturing activity, which still are susceptible to sustainability risk;
•
for the commercial real estate portfolio, the potential impact of general commercial real estate trends, particularly occupancy and leasing rate trends, charge-off severity, nonperforming loan inflows, default likelihood in our book versus the general U.S. averages, loss emergence period, default emergence from recent years compared to historical stressed periods, results of "back testing" of model results versus recent charge-off history, collateral value changes in commercial real estate, and the impact that a negative general macroeconomic condition could have on this sector;
•
for the construction portfolio, construction employment, industry experience on construction loan losses, loss emergence period, construction spending rates, and improved valuation basis of the recent growth in the portfolio; and
•
for the residential, home equity, and personal portfolios, home price indices and delinquency rates, loss emergence period, and general economic conditions and interest rate trends which impact these products.

In determining our September 30, 2014 reserve levels, we established a general reserve level which was higher than our model's output range, in total. This judgment was influenced primarily by recent indicators in our transformational commercial portfolio, specifically, (i) increased velocity into non-performing and criticized loan categories from certain industry sectors in the portfolio which can cause volatility in the reserve requirement, (ii) the impact of competition on loan structures, and (iii) a slight degradation in the portfolio's weighted average risk rating. At the same time, management did not provide a meaningful qualitative adjustment to the model output for transformational commercial real estate loans compared to prior periods as a result of improving portfolio attributes (including stabilization in weighted average risk rating, loss given default and criticized and non-performing loan inflows) and improvement evident in the commercial real estate markets.

Management also considers the amount and characteristics of the accruing TDRs removed from the general reserve formulas as a proxy for potentially heightened risk in the portfolio when establishing final reserve requirements.

The establishment of the allowance for loan losses involves a high degree of judgment and includes an inherent level of imprecision given the difficulty of identifying all the factors impacting loan repayment and the timing of when losses actually occur. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including, but not limited to, client performance, the economy, changes in interest rates and property values, and the interpretation by regulatory authorities of loan classifications.

Although we determine the amount of each element of the allowance separately and consider this process to be an important credit management tool, the entire allowance for loan losses is available for the entire loan portfolio.

Management evaluates the adequacy of the allowance for loan losses and reviews the underlying methodology with the Audit Committee of the Board of Directors quarterly. As of September 30, 2014, management concluded the allowance for loan losses was adequate (i.e., sufficient to absorb losses that are inherent in the portfolio at that date, including for those loans where the loss is not yet identifiable).


86

As an integral part of their examination process, various federal and state regulatory agencies also review the allowance for loan losses. These agencies may require that certain loan balances be classified differently or charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination.

The accounting policies underlying the establishment and maintenance of the allowance for loan losses through provisions charged to operating expense are discussed more fully in Note 1 of "Notes to Consolidated Financial Statements" of our Annual Report on Form 10-K for our fiscal year ended December 31, 2013.

The following table presents changes in the allowance for loan losses, excluding covered assets, for the periods presented.

Table 20
Allowance for Loan Losses and Summary of Loan Loss Experience
(Dollars in thousands)
 
 
Quarter Ended
 
2014
 
2013
 
September 30
 
June 30
 
March 31
 
December 31
 
September 30
Change in allowance for loan losses:
 
Balance at beginning of period
$
146,491

 
$
146,768

 
$
143,109

 
$
145,513

 
$
148,183

Loans charged-off:
 
 
 
 
 
 
 
 
 
Commercial
(227
)
 
(2,142
)
 
(1,487
)
 
(1,536
)
 
(7,285
)
Commercial real estate
(1,133
)
 
(2,082
)
 
(2,582
)
 
(7,297
)
 
(1,706
)
Construction
(7
)
 
—

 
—

 
—

 
—

Residential real estate
(252
)
 
(180
)
 
(235
)
 
(1,887
)
 
(395
)
Home equity
(172
)
 
(268
)
 
(447
)
 
(591
)
 
(2,146
)
Personal
(8
)
 
(13
)
 
(130
)
 
(51
)
 
(893
)
Total charge-offs
(1,799
)
 
(4,685
)
 
(4,881
)
 
(11,362
)
 
(12,425
)
Recoveries on loans previously charged-off:
 
 
 
 
 
 
 
 
 
Commercial
1,145

 
813

 
3,662

 
2,898

 
1,301

Commercial real estate
356

 
1,360

 
688

 
302

 
366

Construction
6

 
9

 
7

 
7

 
7

Residential real estate
9

 
135

 
300

 
4

 
7

Home equity
67

 
60

 
28

 
80

 
135

Personal
128

 
20

 
406

 
757

 
142

Total recoveries
1,711

 
2,397

 
5,091

 
4,048

 
1,958

Net (charge-offs) recoveries
(88
)
 
(2,288
)
 
210

 
(7,314
)
 
(10,467
)
Provisions charged to operating expense
3,732

 
2,011

 
3,449

 
4,910

 
7,797

Balance at end of period
$
150,135

 
$
146,491

 
$
146,768

 
$
143,109

 
$
145,513

Allowance as a percent of loans at period end
1.30
%
 
1.32
%
 
1.34
 %
 
1.34
%
 
1.40
%
Average loans, excluding covered assets
$
11,329,823

 
$
11,019,782

 
$
10,686,513

 
$
10,453,568

 
$
10,268,910

Ratio of net charge-offs (recoveries) (annualized) to average loans outstanding for the period
*

 
0.08
%
 
-0.01
 %
 
0.28
%
 
0.40
%
Allowance for loan losses as a percent of nonperforming loans
204
%
 
191
%
 
156
 %
 
152
%
 
128
%
*    Less than 0.01%

Gross charge-offs declined 86% to $1.8 million for the third quarter 2014 from $12.4 million for the year ago period and down 62% from $4.7 million for second quarter 2014. Commercial loans comprised 13% of total charge-offs, while commercial real estate loans comprised 63% of total charge-offs in the third quarter 2014.

The allowance for loan losses increased $7.0 million to $150.1 million at September 30, 2014 from $143.1 million at December 31, 2013. The change in allowance levels was largely impacted by $903.6 million in loan growth, changes in the composition of the

87

loan portfolio, changes in the quantitative component of the allowance factors and partially offset by $20.8 million decline in nonperforming loans. The provision for loan losses for the quarter was $3.7 million, compared to $2.0 million for the prior quarter and $7.8 million for third quarter 2013, and was aided by $1.7 million in recoveries of previously charged-off loans. The provision for loan losses may fluctuate quarter to quarter depending on the level of loan growth and unevenness in credit quality due to size of individual credits. The allowance for loan losses to total loans ratio was 1.30% at September 30, 2014 and 1.34% at December 31, 2013.

The following table presents our allocation of the allowance for loan losses by loan category at the dates shown.

Table 21
Allocation of Allowance for Loan Losses
(Dollars in thousands)
 
 
September 30, 2014
 
% of Total
 
December 31, 2013
 
% of Total
Commercial
$
103,886

 
69

 
$
80,768

 
57

Commercial real estate
30,387

 
20

 
42,362

 
30

Construction
4,029

 
3

 
3,338

 
2

Residential real estate
5,012

 
3

 
7,555

 
5

Home equity
4,249

 
3

 
5,648

 
4

Personal
2,572

 
2

 
3,438

 
2

Total
$
150,135

 
100
%
 
$
143,109

 
100
%
Specific reserve
$
18,981

 
13
%
 
$
22,377

 
16
%
General allocated reserve
$
131,154

 
87
%
 
$
120,732

 
84
%
Recorded Investment in Loans:
 
 
 
 
 
 
 
Ending balance, specific reserve
$
95,565

 
 
 
$
114,414

 
 
Ending balance, general allocated reserve
11,452,022

 
 
 
10,529,607

 
 
Total loans at period end
$
11,547,587

 
 
 
$
10,644,021

 
 

Under our methodology, the allowance for loan losses is comprised of the following components:

General Allocated Component of the Allowance

The general allocated component of the allowance increased by $10.4 million, or 9%, from $120.7 million at December 31, 2013 to $131.2 million at September 30, 2014. The increase in the general allocated reserve was primarily influenced by the increased reserve needs to reflect the growing loan portfolio and changes in the credit quality of the existing portfolio for certain segments. In addition, lower loss rates are being applied to a larger portion of the total loan portfolio as the portfolio is becoming more weighted in transformational loans, where our historical credit performance has been better, and less weighted in legacy loans, where historical performance has been weaker.

Specific Component of the Allowance

The specific reserve requirements are the summation of individual reserves related to impaired loans that are analyzed on an account by account basis at the balance sheet date. Once a loan is determined to be impaired, the amount of impairment is measured based on the loan's observable fair value; fair value of the underlying collateral less estimated selling costs, if the loan is collateral-dependent; or the present value of expected cash flows discounted at the loan's effective interest rate. At September 30, 2014, the specific component of the allowance totaled $19.0 million, down from $22.4 million at December 31, 2013 with the decrease being largely driven by a release of specific reserves established for problem credits resolved in the first nine months of 2014. At September 30, 2014, impaired loans totaled $95.6 million, of which nearly all are collateral-dependent. Of the $95.6 million in impaired loans at September 30, 2014, 58% required a specific reserve, compared to 60% at December 31, 2013 of the $114.4 million in total impaired loans.


88

Reserve for Unfunded Commitments

In addition to the allowance for loan losses, we maintain a reserve for unfunded commitments at a level we believe to be sufficient to absorb estimated probable losses related to unfunded credit facilities. During the nine months ended September 30, 2014, our reserve for unfunded commitments increased $638,000 from $9.2 million at December 31, 2013 to $9.8 million and consisted of $9.6 million in general reserve and the remaining $235,000 in specific reserves at September 30, 2014. For the nine months ended September 30, 2014, general reserves increased $1.2 million driven by higher unfunded commitment levels and an increase in the likelihood of certain product categories to draw on unused lines and loss factors. This was partially offset by a release in the specific reserve of $560,000, mainly attributable to an individual credit. Net adjustments to the reserve for unfunded commitments are included in other non-interest expense in the Consolidated Statements of Income. Unfunded commitments, excluding covered assets, totaled $5.6 billion and $5.0 billion at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014, unfunded commitments with maturities of less than one year approximated $1.6 billion. For further information on our unfunded commitments, refer to Note 15 of "Notes to Consolidated Financial Statements" in Item 1 of this Form 10-Q.

COVERED ASSETS

Covered assets represent purchased loans and foreclosed loan collateral covered under a loss sharing agreement with the FDIC as a result of the 2009 FDIC-assisted acquisition of the former Founders Bank from the FDIC. Under the loss share agreement, generally the FDIC will assume 80% of the first $173 million of credit losses and 95% of the credit losses in excess of $173 million, in both cases relating to assets that existed on the date of acquisition. The loss share agreement expired on September 30, 2014 for all non-residential mortgage loans and will expire on September 30, 2019 for residential mortgage loans. At the time of expiration, the loans will transfer into the respective asset class within our held for investment loan portfolio. Accordingly, on October 1, 2014, $29.5 million of non-residential mortgage loans were transferred out of covered assets. We do not expect a material impact to our financial results from the expiration of the loss share coverage for non-residential mortgage loans.

The carrying amounts of covered assets as of September 30, 2014 and December 31, 2013 are presented in the following table.

Table 22
Covered Assets
(Amounts in thousands)

 
September 30,
2014
 
December 31,
2013
Commercial loans
$
3,057

 
$
11,562

Commercial real estate loans
24,097

 
46,657

Residential mortgage loans
33,058

 
36,883

Consumer installment and other loans
1,538

 
3,472

Foreclosed real estate
868

 
7,880

Estimated loss reimbursement by the FDIC
2,864

 
6,292

Total covered assets
65,482

 
112,746

Allowance for covered loan losses
(4,485
)
 
(16,511
)
Net covered assets
$
60,997

 
$
96,235


Net covered assets declined by $35.2 million, or 37%, from $96.2 million at December 31, 2013 to $61.0 million at September 30, 2014. The reduction was primarily attributable to $24.9 million in principal paydowns, net of advances, as well as the impact of such on the evaluation of expected cash flows and discount accretion levels. In addition, the estimated loss reimbursements by the FDIC ("the FDIC indemnification receivable") further contributed to the reduction as a result of loss claims paid by the FDIC and amortization of the receivable. The allowance for covered loan losses declined by $12.0 million to $4.5 million at September 30, 2014 from $16.5 million at December 31, 2013, largely due to the lower level of loan balances and the change in expected cash flows on certain covered loan pools lowering the allowance requirement and included the impact of $1.7 million in recoveries in the second quarter 2014. As of September 30, 2014, the FDIC had reimbursed the Company $121.2 million in losses under the loss share agreement.

Covered loan delinquencies total $1.8 million at September 30, 2014, comparable to $1.7 million at December 31, 2013. Nonaccrual covered loans declined by $6.5 million, or 41%, from $15.6 million as of December 31, 2013 to $9.1 million as of September 30,

89

2014. Covered loan delinquencies and nonaccrual loans exclude purchased impaired loans which are accounted for on a pool basis. Since each purchased impaired pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past due status of the pools, or that of individual loans within the pools, is not meaningful. Because we are recognizing interest income on each pool of such loans, they are all considered to be performing. Covered assets are excluded from the asset quality presentation of our originated loan portfolio, given the loss share indemnification from the FDIC.

FUNDING AND LIQUIDITY MANAGEMENT

We have implemented various policies to manage our liquidity position in order to meet our cash flow requirements and maintain sufficient capacity to meet our clients’ needs and accommodate fluctuations in asset and liability levels due to changes in our business operations as well as unanticipated events. We also have in place contingency funding plans designed to allow us to operate through a period of stress when access to normal sources of funding may be constrained. As part of our asset/liability management strategy, we utilize a variety of funding sources in an effort to optimize the balance of duration risk, cost, liquidity risk and contingency planning.

The Bank’s principal source of funds is deposits which includes large institutional deposits and brokered deposits. Other funding sources are wholesale borrowings and cash from operations. The Bank’s principal uses of funds include funding growth in the core asset portfolios, including loans, and to a lesser extent, our investment portfolio, which is used primarily to manage liquidity risk and interest rate risk. The primary sources of funding for the Holding Company include dividends when received from the Bank, intercompany tax reimbursements from the Bank, and proceeds from the issuance of senior and subordinated debt, as well as equity. During first quarter 2014, the Bank paid a $50 million dividend to the Holding Company. In September 2014, the Holding Company amended and renewed its 364-day revolving line of credit with a group of commercial banks allowing borrowings of up to $60.0 million in total as an additional source of working capital. As of September 30, 2014, no amounts have been drawn on the facility. Net liquid assets at the Holding Company totaled $89.1 million at September 30, 2014 and $55.9 million at December 31, 2013.

On October 2, 2014, the Bank paid a $50 million dividend to the Holding Company. On October 8, 2014, using available cash resources, the Holding Company redeemed $75.0 million of the $143.8 million in outstanding 10% Debentures. After the redemption, the Holding Company had $63.6 million in cash. Refer to Trust Preferred Securities and Long-term Debt Redemption - October 2014 discussion within the Third Quarter Overview of "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for further information on the redemption.

Our cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Cash flows from operating activities primarily include results of operations for the period, adjusted for items in net income that did not impact cash. Net cash provided by operating activities decreased by $76.7 million from the prior year period to $129.0 million for the nine months ended September 30, 2014. Cash flows from investing activities reflect the impact of loans and investments acquired for our interest-earning asset portfolios and asset maturities and sales. For the nine months ended September 30, 2014, net cash used in investing activities was $963.1 million, compared to $496.3 million for the prior year period. This change in cash flows primarily represents larger amounts of cash redeployed towards the funding of loans in the nine months ended September 30, 2014 than the prior year period. Cash flows from financing activities include transactions and events whereby cash is obtained from and/or paid to depositors, creditors or investors. Net cash provided by financing activities for the nine months ended September 30, 2014 was $991.4 million, compared to net cash used in financing activities of $222.8 million for the prior year period. The current period financing cash flows primarily represents a net increase of $964.1 million in deposits, including deposits held-for-sale, for the nine months ended September 30, 2014 to support 2014 loan growth.

Deposits (excluding deposits held-for-sale)

Our deposit base is predominately comprised of middle market commercial client relationships from a diversified industry base. Through our community banking and private wealth groups, we offer a variety of personal banking products, including checking, savings and money market accounts and CDs, which serve as an additional source of deposits.


90

The following table provides a comparison of deposits by category for the periods presented.

Table 23
Deposits (1) 
(Dollars in thousands)

 
September 30,
2014
 
%
of Total
 
December 31,
2013
 
%
of Total
 
% Change in Balances
Noninterest-bearing deposits
$
3,342,862

 
26
 
$
3,172,676

 
26
 
5

Interest-bearing demand deposits
1,433,429

 
11
 
1,470,856

 
12
 
-3

Savings deposits
310,850

 
2
 
284,482

 
2
 
9

Money market accounts
5,058,016

 
39
 
4,515,079

 
38
 
12

Time deposits
1,342,765

 
11
 
1,336,522

 
11
 
*

Brokered time deposits
1,361,282

 
11
 
1,234,026

 
11
 
10

Total deposits
$
12,849,204

 
100
 
$
12,013,641

 
100
 
7

Note: Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
(1) 
Excludes deposits held-for-sale of $128.5 million as of September 30, 2014.
*
Less than 1%

Total deposits at September 30, 2014 increased by $835.6 million from year end 2013, primarily driven by a 12% increase in money market accounts and a 5% increase in noninterest-bearing demand deposits. Consistent with prior years, we tend to experience cyclically strong deposit growth in the latter half of the year. The deposit balances of our commercial clients may fluctuate depending on their cash management and liquidity needs. The deposit to loan ratio was 111.3% at September 30, 2014 compared to 112.9% at December 31, 2013, and at both September 30, 2014 and December 31, 2013, 85% of our total assets were funded by deposits.

During 2014 we have undertaken initiatives that may create more deposit gathering opportunities including opening a new branch office in the suburbs of Chicago and establishing a specialized group to focus on providing banking services to bank and non-bank financial service companies.

Brokered time deposits totaled $1.4 billion at September 30, 2014, up $127.3 million from December 31, 2013. Brokered time deposits fluctuate based upon the Bank's general funding needs related to deposits, loans and other funding needs. Refer to Table 25 for further details on brokered deposits.

Public fund balances, denoting the funds held on account for municipalities and other public entities, are included as a part of our total deposits. We enter into specific agreements with certain public clients to pledge collateral, primarily securities, in support of their balances on deposit. At September 30, 2014, we had public funds on deposit totaling $1.0 billion, of which approximately 20% were collateralized with securities. At December 31, 2013, public fund account balances totaled $965.4 million. Changes in balances are influenced by the tax collection activities of the various municipalities as well as the general level of interest rates.

Given the commercial focus of our business strategy, we offer a suite of deposit and cash management products and services that support our efforts to attract and retain commercial clients, resulting in a concentration of large, noninterest-bearing and interest-bearing deposits (which are typically larger than retail accounts) in our funding base. While we expect overall liquidity in the banking system to remain high while the economy recovers and market factors improve, the level of our commercial deposit balances may fluctuate significantly based on depositor needs and other economic, market or regulatory factors, including deposit insurance limits. If commercial deposit balances decline, we would expect to rely on other sources of liquidity, including wholesale funding.


91

The following table presents a comparison of our large deposit relationships as of the dates shown.

Table 24
Large Deposit Relationships
(Dollars in thousands)

 
2014
 
2013
 
September 30
 
December 31
 
September 30
Ten largest depositors:
 
 
 
 
 
Deposit amounts
$
1,953,423

 
$
2,078,273

 
$
2,273,484

Percentage of total deposits
15
%
 
17
%
 
19
%
$75 Million or More:
 
 
 
 
 
Deposit amounts
$
2,991,840

 
$
2,614,321

 
$
2,620,139

Percentage of total deposits
23
%
 
22
%
 
22
%
Number of deposit relationships
21

 
16

 
14

Percentage from financial services-related business (1)
48
%
 
72
%
 
71
%
$50 Million or More:
 
 
 
 
 
Deposit amounts
$
3,942,862

 
$
3,260,544

 
$
3,349,788

Percentage of total deposits
31
%
 
27
%
 
28
%
Number of deposit relationships
36

 
27

 
26

Percentage from financial services-related business (1)
48
%
 
62
%
 
63
%
(1) 
Includes omnibus accounts from broker-dealer and mortgage companies containing funds of their customers, some of which may be eligible for pass-through deposit insurance, and some of which are classified as brokered deposits for regulatory purposes.

The amount and number of large deposit relationships at September 30, 2014 compared to December 31, 2013 was impacted by overall deposit growth, increases in large depositor account balances and the addition of new larger, non-financial services-related account relationships.

We take deposit concentration risk into account in managing our liquid asset levels. Liquid assets refer to cash on hand, federal funds sold and securities. Net liquid assets represent the sum of the liquid asset categories less the amount of such assets pledged to secure public funds and other deposits that require collateral, and for other purposes as required or permitted by law. Net liquid assets at the Bank were $2.7 billion and $2.4 billion at September 30, 2014 and December 31, 2013, respectively.

We maintain liquidity at levels we believe sufficient to meet anticipated client liquidity needs, fund anticipated loan growth, selectively purchase securities and investments, and thereby decreasing or increasing wholesale funds. Deposit balances fluctuate as a result of client business and liquidity needs (which are in part cyclical), market and economic conditions, and the pricing and types of deposits offered by the Bank.

We first look toward internally generated deposits as our funding source for loan and asset growth. These deposits are generated principally through the development of long-term relationships with clients with specific focus on treasury management products. We also utilize FHLB funding and other wholesale funding, including traditional brokered time deposits, as needed to enhance liquidity and to fund asset growth.

Total brokered deposits, as defined for regulatory reporting purposes, were $2.9 billion, $2.6 billion and $2.9 billion at September 30, 2014, December 31, 2013 and September 30, 2013, respectively and represented 22% of total deposits at September 30, 2014 and December 31, 2013 and 25% at September 30, 2013. Total brokered deposits are comprised of traditional brokered time deposits, CDARS®, cash sweep program deposits and other deposits classified as brokered for regulatory purposes that may be reported in demand deposit accounts, money market accounts or time deposit accounts.

Traditional brokered time deposits are deposits that are primarily sourced from unrelated financial institutions by a third party. Traditional brokered time deposits can vary in term from one month to several years and can have the benefit of being a source of longer-term funding. Our asset/liability management policy currently limits our use of traditional brokered time deposits to levels no more than 25% of total deposits, and total brokered deposits (as defined for regulatory reporting purposes) to levels no more than 40% of total deposits. Traditional brokered time deposits were 5% and 3% of total deposits at September 30, 2014 and December 31, 2013, respectively.

92


The CDARS® deposit program allows clients to obtain FDIC deposit insurance for time deposits in excess of the FDIC insurance limits.

Cash sweep program deposits come from the Bank’s relationships with securities broker dealers (“BDs”). From time to time, the BDs’ clients may have cash in their accounts with the BDs pending re-investment in other securities or for liquidity needs. Pursuant to the cash sweep programs, the BDs allow their clients to elect to sweep idle cash into an omnibus bank deposit account established by the BD as agent or custodian for the benefit of its clients. The cash sweep program deposits are now classified as brokered deposits for regulatory reporting purposes. Unlike traditional brokered deposits, the cash sweep program deposits are not time deposits, but are generally maintained in money market accounts and may be eligible for FDIC pass-through insurance. The cash sweep program deposits are subject to contracts between the Bank and the BDs that establish terms of the deposits such as price and duration. Cash sweep program deposits have historically been a stable source of liquidity and totaled $1.5 billion, $1.3 billion and $1.4 billion at September 30, 2014, December 31, 2013 and September 30, 2013, respectively. Approximately 60% of the cash sweep program deposit balances at September 30, 2014 is from BDs who have had a deposit relationship with the Bank for more than 4 years.

The following table provides a comparison of brokered deposits by category for the periods presented.

Table 25
Brokered Deposits
(Dollars in thousands)

 
2014
 
2013
 
September 30
 
December 31
 
September 30

Interest-bearing demand deposits
$
186,684

 
$
178,088

 
$
76,495

Money market accounts
1,341,706

 
1,201,117

 
1,399,130

Brokered time deposits:
 
 
 
 
 
CDARS (1)
597,449

 
711,412

 
755,167

Other
100,440

 
114,249

 
127,214

Traditional
663,393

 
408,365

 
548,429

Total brokered time deposits
1,361,282

 
1,234,026

 
1,430,810

Total brokered deposits
$
2,889,672

 
$
2,613,231

 
$
2,906,435

Brokered deposits as a % of total deposits
22
%
 
22
%
 
25
%
(1) 
The CDARS® deposit program is a deposit services arrangement that effectively achieves FDIC deposit insurance for jumbo deposit relationships. These deposits are classified as brokered time deposits for regulatory reporting purposes.



93

The following table presents our time and brokered time deposits as of September 30, 2014, with scheduled maturity dates during the period specified.

Table 26
Scheduled Maturities of Time and Brokered Time Deposits (1) 
(Amounts in thousands)

 
Total
Year Ended December 31, 2014:
 
 Fourth quarter
$
512,748

2015
1,554,971

2016
278,017

2017
157,555

2018
122,308

2019 and thereafter
78,448

Total
$
2,704,047

(1) 
Excludes time deposits held-for-sale of $51.0 million at September 30, 2014.

The following table presents our time and brokered time deposits of $100,000 or more as of September 30, 2014, which are expected to mature during the period specified.

Table 27
Maturities of Time Deposits of $100,000 or More (1) 
(Amounts in thousands)

 
September 30, 2014
Maturing within 3 months
$
467,475

After 3 but within 6 months
404,728

After 6 but within 12 months
798,188

After 12 months
726,773

Total
$
2,397,164

(1) 
Excludes time deposits held-for-sale of $51.0 million at September 30, 2014.

Over the past several years in the generally low interest rate environment, our clients have tended to keep the maturities of their deposits short, and short-term certificates of deposit have generally been renewed on terms and with maturities of similar duration. In the event that time deposits are not renewed, we expect to replace those deposits with brokered time deposits or borrowed money sufficient to meet our funding needs.

Deposits held-for-sale

On October 8, 2014, we announced that we entered into an agreement to sell our branch office located in Norcross, Georgia. The transaction includes the sale of certain deposits totaling $128.5 million at September 30, 2014. These deposits were classified as held-for-sale at September 30, 2014.

Short-term and Secured Borrowings and Long-term Debt

Short-term borrowings at September 30, 2014 totaled $3.0 million, up $1.0 million from the $2.0 million at December 31, 2013. Short-term borrowings represent borrowings that mature in one year or less and consisted solely of FHLB advances at September 30, 2014 and December 31, 2013. We may continue to use FHLB advances to meet our funding needs, although we may choose to use brokered time deposits as an alternative depending on cost and certain other factors.


94

Also included in short-term and secured borrowings on the Consolidated Statements of Financial Condition are amounts related to certain loan participation agreements on loans we originated that were classified as secured borrowings as they did not qualify for sale accounting treatment. As of September 30, 2014, these loan participation agreements totaled $3.6 million and $6.4 million at December 31, 2013. A corresponding amount was recorded within loans on the Consolidated Statements of Financial Condition.

Long-term debt, which is comprised of junior subordinated debentures, subordinated debt, and the long-term portion of FHLB advances, totaled $656.8 million at September 30, 2014 and $627.8 million at December 31, 2013. During third quarter 2014, we entered into two FHLB advances totaling $30.0 million with a weighted average interest rate of 3.71%, due in September 2019. These advances provide for a one-time option in September 2016 to increase the amount outstanding up to $150.0 million each at the same fixed rate as the original advance. At September 30, 2014, the weighted average interest rate on the $287.0 million long-term portion of outstanding FHLB advances was 0.57%. The earliest scheduled maturity of long term-debt is $252.0 million of FHLB advances due in December 2015.

On October 8, 2014, we redeemed $75.0 million of the $143.8 million outstanding 10% Debentures. For a complete discussion of the redemption, refer to "Trust Preferred Securities and Long-term Debt Redemption - October 2014" within the Third Quarter Overview section presented at the beginning of Management's Discussion and Analysis.

In addition to on-balance sheet funding and other liquid assets such as cash and investment securities, we maintain access to various external sources of funding, which assist in the prudent management of funding costs, interest rate risk, and anticipated funding needs or other considerations. Some sources of funding are accessible same-day while others require advance notice. Funds that are immediately accessible include Federal Fund counterparty lines, which are uncommitted lines of credit from other financial institutions, and the borrowing term is typically overnight. Availability of Federal Fund lines fluctuates based on market conditions and counterparty relationship strength. Unused overnight Fed Funds available totaled $625.0 million at September 30, 2014 and $520.0 million at December 31, 2013, respectively.

We had borrowing capacity of $770.6 million with the FHLB Chicago at September 30, 2014, of which $490.3 million was available, subject to the additional investment in FHLB Chicago stock required. The borrowing capacity is subject to change based on the availability of acceptable collateral to pledge and the level of our investment in FHLB Chicago stock. This borrowing source may be utilized by the Bank for short-term funding needs, including overnight advances, as well as long-term funding needs.

Repurchase agreements ("Repos") are also an immediate source of funding in which we pledge assets to a counterparty against which we can borrow with the agreement to repurchase at a specified date in the future. Repos can vary in term, from overnight to longer, but are regarded as short-term in nature.

The discount window at the FRB is an additional source of overnight funding. We maintain access to the discount window by pledging loans as collateral to the FRB. Funding availability is primarily dictated by the amount of loans pledged, but also impacted by the margin applied to the loans by the FRB. The amount of loans pledged to the FRB can fluctuate due to the availability of loans eligible under the FRB’s criteria which include stipulations of documentation requirements, credit quality, payment status and other criteria. At September 30, 2014, we had $460.2 million in borrowing capacity through the FRB discount window’s primary credit program compared to $621.9 million at December 31, 2013. We had no borrowings outstanding as of September 30, 2014.

CAPITAL

Equity totaled $1.4 billion at September 30, 2014, increasing by $133.4 million compared to December 31, 2013, and is primarily due to net income for the nine months ended September 30, 2014 of $115.9 million, along with a $6.4 million increase in accumulated other comprehensive income, net of tax, which is mainly associated with an increase in market values on our available-for-sale investment portfolio.

Capital Management

Under applicable regulatory capital adequacy guidelines, the Company and the Bank are subject to various capital requirements adopted and administered by the federal banking agencies. These guidelines specify minimum capital ratios calculated in accordance with the definitions in the guidelines, including the leverage ratio which is Tier 1 capital as a percentage of adjusted average assets, and the Tier 1 capital ratio and the total capital ratio each as a percentage of risk-weighted assets and off-balance sheet items that have been weighted according to broad risk categories. These minimum ratios are shown in the table below.

To satisfy safety and soundness standards, banking institutions are expected to maintain capital levels in excess of the regulatory minimums depending on the risk inherent in the balance sheet, regulatory expectations and the changing risk profile of business

95

activities. Under our capital management policy, we conduct periodic stress testing of our capital adequacy and target capital ratios at levels above regulatory minimums that we believe are appropriate based on various other risk considerations, including the current operating and economic environment and outlook, internal risk guidelines, and our strategic objectives as well as regulatory expectations.

The following table presents information about our capital measures and the related regulatory capital guidelines.

Table 28
Capital Measurements
(Dollars in thousands)
 
Actual
 
FRB Guidelines
For Minimum
Regulatory Capital
 
Regulatory Minimum
For "Well-Capitalized"
under FDICIA
 
September 30,
2014
 
December 31,
2013
 
Ratio
 
Excess Over
Regulatory
Minimum at
9/30/14
 
Ratio
 
Excess Over
"Well
Capitalized"
under
FDICIA at
9/30/14
Regulatory capital ratios:
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
13.18
%
 
13.30
%
 
8.00
%
 
$
728,321

 
n/a

 
n/a

The PrivateBank
12.40

 
12.69

 
n/a

 
n/a

 
10.00
%
 
$
335,875

Tier 1 risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
11.12

 
11.08

 
4.00

 
1,001,007

 
n/a

 
n/a

The PrivateBank
11.22

 
11.44

 
n/a

 
n/a

 
6.00

 
732,089

Tier 1 leverage:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
10.70

 
10.37

 
4.00

 
978,622

 
n/a

 
n/a

The PrivateBank
10.79

 
10.70

 
n/a

 
n/a

 
5.00

 
844,033

Other capital ratios (consolidated) (1):
 
 
 
 
 
 
 
 
 
 
 
Tier 1 common equity to risk-weighted assets (2)
9.38

 
9.19

 
 
 
 
 
 
 
 
Tangible common equity to tangible assets
8.84

 
8.57

 
 
 
 
 
 
 
 
(1) 
Ratios are not subject to formal FRB regulatory guidance and are non-U.S. GAAP financial measures. Refer to Table 29, "Non-U.S. GAAP Financial Measures" for a reconciliation to U.S. GAAP presentation.
(2) 
For purposes of our presentation, we calculate this ratio under currently effective requirements and without giving effect to the final Basel III capital rules adopted and issued by the Federal Reserve Board in July 2013, which are effective January 1, 2014 with compliance required January 1, 2015.
n/a
Not applicable.

As of September 30, 2014, all of our $244.8 million of outstanding junior subordinated debentures held by trusts that issued trust preferred securities, which as a percentage of Tier 1 capital was 16%, are included in Tier 1 capital. The Tier 1 qualifying amount is limited to 25% of Tier 1 capital as defined under FRB regulations. Under the final regulatory capital rules issued in 2013, the Tier 1 capital treatment for the Company's trust preferred securities will be grandfathered, subject to the 25% limitation of Tier 1 capital. In the event we make certain acquisitions the Tier 1 capital treatment for these instruments will be subject to the phase-out schedule for bank holding companies with greater than $15 billion in total assets. All of our outstanding trust preferred securities are callable by us and we may, from time to time, redeem some or all of these securities with internal resources or with other instruments depending on market conditions and other factors.

On October 8, 2014, we redeemed $75.0 million of the $143.8 million outstanding 10% Debentures using available cash. On a proforma basis, after giving effect for the 10% Debenture redemption, the Company's total risked-based capital ratio and Tier 1 risk-based capital ratio would have been 12.64% and 10.58%, respectively, at September 30, 2014. Refer to Trust Preferred Securities and Long-term Debt Redemption - October 2014 discussion within the Third Quarter Overview of "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for further information on the redemption.


96

For a full description of our junior subordinated debentures and subordinated debt, refer to Notes 9 and 10 of "Notes to Consolidated Financial Statements" in Item 1 of this Form 10-Q.

Dividends

We declared dividends of $0.01 per common share during the third quarter 2014, unchanged from 2013. Based on our closing stock price on September 30, 2014 of $29.91 per share, the annualized dividend yield on our common stock was 0.13%. The dividend payout ratio, which represents the percentage of common dividends declared to stockholders to basic earnings per share, was 1.92% for the third quarter 2014 compared to 2.38% for the third quarter 2013. While we have no current plans to raise the amount of the dividends currently paid on our common stock, our Board of Directors regularly evaluates our dividend payout ratio, taking into consideration internal capital guidelines and our strategic objectives and business plans.

For additional information regarding limitations and restrictions on our ability to pay dividends, refer to the "Supervision and Regulation" and "Risk Factors" sections of our 2013 Annual Report on Form 10-K.

Conversion of Nonvoting Common Stock

During the third quarter 2014, holders of 1.3 million shares of our nonvoting common stock converted such shares into an equal number of newly-issued shares of our voting common stock. The conversion was done in accordance with the terms of the non-voting common stock and in connection with the holders' sale of such newly-issued voting common stock.

Stock Repurchases and Shares Issued in Connection with Share-Based Compensation Plans

We currently do not have a stock repurchase program in place; however, we have repurchased shares in connection with the administration of our employee benefit plans. Under the terms of these plans, we accept shares of common stock from plan participants if they elect to surrender previously-owned shares upon exercise of options to cover the exercise price or, in the case of both restricted shares of common stock or stock options, the withholding of shares to satisfy tax withholding obligations associated with the vesting of restricted shares or exercise of stock options. During the third quarter 2014, we repurchased 1,081 shares with an average value of $29.57 per share.

The Company issues shares from treasury, when available, or new shares to fulfill its obligation to issue shares granted pursuant to the share-based compensation plans. The Company held 213 shares of voting common stock as treasury stock at September 30, 2014 and 274,000 shares at December 31, 2013. The reduction in treasury shares is primarily attributable to the annual granting of restricted stock awards in February 2014 as part of the Company's 2013 annual incentive and 2014 long-term incentive programs as well as for stock option exercises during the first nine months of 2014.

NON-U.S. GAAP FINANCIAL MEASURES

This press release contains both U.S. GAAP and non-U.S. GAAP based financial measures. These non-U.S. GAAP financial measures include net interest income, net interest margin, net revenue, operating profit, and efficiency ratio all on a fully taxable-equivalent basis, return on average tangible common equity, Tier 1 common equity to risk-weighted assets, tangible common equity to risk-weighted assets, tangible common equity to tangible assets, and tangible book value. We believe that presenting these non-U.S. GAAP financial measures will provide information useful to investors in understanding our underlying operational performance, our business, and performance trends and facilitates comparisons with the performance of others in the banking industry.

We use net interest income on a taxable-equivalent basis in calculating various performance measures by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments assuming a 35% tax rate. Management believes this measure to be the preferred industry measurement of net interest income as it enhances comparability to net interest income arising from taxable and tax-exempt sources, and accordingly believes that providing this measure may be useful for peer comparison purposes.

In addition to capital ratios defined by banking regulators, we also consider various measures when evaluating capital utilization and adequacy, including return on average tangible common equity, Tier 1 common equity to risk-weighted assets, tangible common equity to risk-weighted assets, tangible common equity to tangible assets, and tangible book value. These calculations are intended to complement the capital ratios defined by banking regulators for both absolute and comparative purposes. All of these measures exclude the ending balances of goodwill and other intangibles while certain of these ratios exclude preferred capital components. Because U.S. GAAP does not include capital ratio measures, we believe there are no comparable U.S. GAAP financial measures to these ratios. We believe these non-U.S. GAAP financial measures are relevant because they provide information that is helpful

97

in assessing the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of our capitalization to other similar companies. However, because there are no standardized definitions for these ratios, our calculations may not be comparable with other companies, and this may affect the usefulness of these measures to investors. Calculations of the Tier 1 common equity to risk-weighted assets ratio contained herein exclude the effect of the final Basel III capital rules adopted and issued by the Federal Reserve Board in July 2013, which are effective January 1, 2014 with compliance required January 1, 2015.

Non-U.S. GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-U.S. GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyses of results as reported under U.S. GAAP. As a result, we encourage readers to consider our Consolidated Financial Statements in their entirety and not to rely on any single financial measure.


98

The following table reconciles non-U.S. GAAP financial measures to U.S. GAAP.

Table 29
Non-U.S. GAAP Financial Measures
(Amounts in thousands)
(Unaudited)
 
Quarters Ended
 
2014
 
2013
 
September 30
 
June 30
 
March 31
 
December 31
 
September 30
Taxable-equivalent net interest income
 
 
 
 
 
 
 
 
 
U.S. GAAP net interest income
$
116,758

 
$
112,351

 
$
108,752

 
$
108,456

 
$
105,835

Taxable-equivalent adjustment
811

 
744

 
800

 
840

 
818

Taxable-equivalent net interest income (a)
$
117,569

 
$
113,095

 
$
109,552

 
$
109,296

 
$
106,653

Average Earning Assets (b)
$
14,283,920

 
$
13,936,754

 
$
13,564,530

 
$
13,472,632

 
$
13,154,557

Net Interest Margin ((a)annualized) / (b)
3.23
%
 
3.21
%
 
3.23
%
 
3.18
%
 
3.18
%
Net Revenue
 
 
 
 
 
 
 
 
 
Taxable-equivalent net interest income
$
117,569

 
$
113,095

 
$
109,552

 
$
109,296

 
$
106,653

U.S. GAAP non-interest income
30,669

 
30,259

 
26,236

 
26,740

 
27,773

Net revenue (c)
$
148,238

 
$
143,354

 
$
135,788

 
$
136,036

 
$
134,426

Operating Profit
 
 
 
 
 
 
 
 
 
U.S. GAAP income before income taxes
$
65,701

 
$
66,818

 
$
55,531

 
$
54,893

 
$
54,219

Provision for loan and covered loan losses
3,890

 
327

 
3,707

 
4,476

 
8,120

Taxable-equivalent adjustment
811

 
744

 
800

 
840

 
818

Operating profit
$
70,402

 
$
67,889

 
$
60,038

 
$
60,209

 
$
63,157

Efficiency Ratio
 
 
 
 
 
 
 
 
 
U.S. GAAP non-interest expense (d)
$
77,836

 
$
75,465

 
$
75,750

 
$
75,827

 
$
71,269

Net revenue
$
148,238

 
$
143,354

 
$
135,788

 
$
136,036

 
$
134,426

Efficiency ratio (d) / (c)
52.51
%
 
52.64
%

55.79
%

55.74
%

53.02
%
Adjusted Net Income
 
 
 
 
 
 
 
 
 
U.S. GAAP net income available to common stockholders
$
40,527

 
$
40,824

 
$
34,505

 
$
33,706

 
$
33,058

Amortization of intangibles, net of tax
458

 
458

 
458

 
471

 
472

Adjusted net income (e)
$
40,985

 
$
41,282

 
$
34,963

 
$
34,177

 
$
33,530

Average Tangible Common Equity
 
 
 
 
 
 
 
 
 
U.S. GAAP average total equity
$
1,426,273

 
$
1,378,581

 
$
1,335,413

 
$
1,300,893

 
$
1,257,541

Less: average goodwill
94,041

 
94,041

 
94,041

 
94,477

 
94,494

Less: average other intangibles
6,996

 
7,749

 
8,506

 
10,074

 
10,865

Average tangible common equity (f)
$
1,325,236

 
$
1,276,791

 
$
1,232,866

 
$
1,196,342

 
$
1,152,182

Return on average tangible common equity ((e) annualized) / (f)
12.27
%
 
12.97
%
 
11.50
%
 
11.33
%
 
11.55
%


99

Non-U.S. GAAP Financial Measures (Continued)
(Amounts in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
Taxable-equivalent net interest income
 
 
 
U.S. GAAP net interest income
$
337,861

 
$
312,607

Taxable-equivalent adjustment
2,355

 
2,407

Taxable-equivalent net interest income (a)
$
340,216

 
$
315,014

Average Earning Assets (b)
$
13,931,019

 
$
13,013,825

Net Interest Margin ((a) annualized) / (b)
3.22
%
 
3.19
%
Net Revenue
 
 
 
Taxable-equivalent net interest income
$
340,216

 
$
315,014

U.S. GAAP non-interest income
87,164

 
87,250

Net revenue (c)
$
427,380

 
$
402,264

Operating Profit
 
 
 
U.S. GAAP income before income taxes
$
188,050

 
$
145,050

Provision for loan and covered loan losses
7,924

 
27,320

Taxable-equivalent adjustment
2,355

 
2,407

Operating profit
$
198,329

 
$
174,777

Efficiency Ratio
 
 
 
U.S. GAAP non-interest expense (d)
$
229,051

 
$
227,487

Net revenue
$
427,380

 
$
402,264

Efficiency ratio (d) / (c)
53.59
%
 
56.55
%
Adjusted Net Income
 
 
 
U.S. GAAP net income available to common stockholders
$
115,856

 
$
89,243

Amortization of intangibles, net of tax
1,374

 
1,419

Adjusted net income (e)
$
117,230

 
$
90,662

Average Tangible Common Equity
 
 
 
U.S. GAAP average total equity
$
1,380,422

 
$
1,245,214

Less: average goodwill
94,041

 
94,506

Less: average other intangibles
7,745

 
11,640

Less: average preferred stock
—

 
—

Average tangible common equity (f)
$
1,278,636

 
$
1,139,068

Return on average tangible common equity ((e) annualized) / (f)
12.29
%
 
10.67
%


100

Non-U.S. GAAP Financial Measures (Continued)
(Amounts in thousands)
(Unaudited)
 
2014
 
2013
 
September 30
 
June 30
 
March 31
 
December 31
 
September 30
Tier 1 Common Capital
 
 
 
 
 
 
 
 
 
U.S. GAAP total equity
$
1,435,309

 
$
1,397,821

 
$
1,343,246

 
$
1,301,904

 
$
1,273,688

Trust preferred securities
244,793

 
244,793

 
244,793

 
244,793

 
244,793

Less: accumulated other comprehensive income, net of tax
16,236

 
23,406

 
13,147

 
9,844

 
18,323

Less: goodwill
94,041

 
94,041

 
94,041

 
94,041

 
94,484

Less: other intangibles
6,627

 
7,381

 
8,136

 
8,892

 
10,486

Less: disallowed servicing rights
42

 
32

 
32

 
—

 
—

Tier 1 risk-based capital
1,563,156

 
1,517,754

 
1,472,683

 
1,433,920

 
1,395,188

Less: trust preferred securities
244,793

 
244,793

 
244,793

 
244,793

 
244,793

Tier 1 common capital (g)
$
1,318,363

 
$
1,272,961

 
$
1,227,890

 
$
1,189,127

 
$
1,150,395

Tangible Common Equity
 
 
 
 
 
 
 
 
 
U.S. GAAP total equity
$
1,435,309

 
$
1,397,821

 
$
1,343,246

 
$
1,301,904

 
$
1,273,688

Less: goodwill
94,041

 
94,041

 
94,041

 
94,041

 
94,484

Less: other intangibles
6,627

 
7,381

 
8,136

 
8,892

 
10,486

Tangible common equity (h)
$
1,334,641

 
$
1,296,399

 
$
1,241,069

 
$
1,198,971

 
$
1,168,718

Tangible Assets
 
 
 
 
 
 
 
 
 
U.S. GAAP total assets
$
15,190,468

 
$
14,602,404

 
$
14,304,782

 
$
14,085,746

 
$
13,869,140

Less: goodwill
94,041

 
94,041

 
94,041

 
94,041

 
94,484

Less: other intangibles
6,627

 
7,381

 
8,136

 
8,892

 
10,486

Tangible assets (i)
$
15,089,800

 
$
14,500,982

 
$
14,202,605

 
$
13,982,813

 
$
13,764,170

Risk-weighted Assets (j)
$
14,053,735

 
$
13,506,797

 
$
13,160,955

 
$
12,938,576

 
$
12,630,779

Period-end Common Shares Outstanding (k)
78,121

 
78,069

 
78,049

 
77,708

 
77,680

Ratios:
 
 
 
 
 
 
 
 
 
Tier 1 common equity to risk-weighted assets (g) / (j)
9.38
%
 
9.42
%
 
9.33
%
 
9.19
%
 
9.11
%
Tangible common equity to risk-weighted assets (h) / (j)
9.50
%
 
9.60
%
 
9.43
%
 
9.27
%
 
9.25
%
Tangible common equity to tangible assets (h) / (i)
8.84
%
 
8.94
%
 
8.74
%
 
8.57
%
 
8.49
%
Tangible book value (h) / (k)
$
17.08

 
$
16.61

 
$
15.90

 
$
15.43

 
$
15.05


ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

As a continuing part of our asset/liability management, we attempt to manage the impact of fluctuations in market interest rates on our net interest income. This effort entails providing a reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield. We may manage interest rate risk by structuring the asset and liability characteristics of our balance sheet and/or by executing derivatives designated as cash flow hedges. We initiated the use of interest rate derivatives as part of our asset liability management strategy in July 2011 to hedge interest rate risk in our primarily floating-rate loan portfolio and, depending on market conditions, we may expand this program and enter into additional interest rate swaps.

Interest rate changes do not affect all categories of assets and liabilities equally or simultaneously. There are other factors that are difficult to measure and predict that would influence the effect of interest rate fluctuations on our Consolidated Statements of Income.

101


The majority of our interest-earning assets are floating-rate instruments. At September 30, 2014, approximately 78% of the total loan portfolio is indexed to LIBOR, 17% of the total loan portfolio is indexed to the prime rate, and another 1% of the total loan portfolio otherwise adjusts with other reference interest rates. Of the $8.1 billion in loans maturing after one year with a floating interest rate, $1.4 billion are subject to interest rate floors, of which 92% are in effect at September 30, 2014 and are reflected in the interest sensitivity analysis below. It is anticipated that as loans renew at maturity, it will be difficult to maintain existing floors given the competitive environment. To manage the interest rate risk of our balance sheet, we have the ability to use a combination of financial instruments, including medium-term and short-term financings, variable-rate debt instruments, fixed-rate loans and securities and interest rate swaps.

We use a simulation model to estimate the potential impact of various interest rate changes on our income statement and our interest-earning asset and interest-bearing liability portfolios. The starting point of the analysis is the current size and nature of these portfolios at the beginning of the measurement period as well as the then-current applicable pricing structures. During the twelve-month measurement period, the model will re-price assets and liabilities based on the contractual terms and market rates in effect at the beginning of the measurement period and assuming instantaneous parallel shifts in the applicable yield curves and instruments remain at that new interest rate through the end of the twelve-month measurement period. The model only analyzes changes in the portfolios based on assets and liabilities at the beginning of the measurement period and does not assume any changes from growth or business plans over the following twelve months.

The sensitivity analysis is based on numerous assumptions including: the nature and timing of interest rate levels including the shape of the yield curve, prepayments on loans and securities, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows and others. While our assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how client preferences or competitor influences might change. In addition, the simulation model assumes certain one-time instantaneous interest rate shifts that are consistent across all yield curves and do not continue to increase over the measurement period. As such, these assumptions and modeling reflect an estimation of the sensitivity to interest rates or market risk and do not predict the timing and direction of interest rates or the shape and steepness of the yield curves. Therefore, the actual results may differ materially from these simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

Modeling the sensitivity of net interest income to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. These assumptions are periodically reviewed and updated in the context of various internal and external factors including balance sheet changes, product offerings, product mix, external micro- and macro-economic factors, anticipated client behavior and anticipated Company and market pricing behavior, all of which may occur in dynamic and non-linear fashion. During 2013 and 2014, we conducted historical deposit re-pricing and deposit lifespan/retention analyses and adjusted our forward-looking assumptions related to client and market behavior. Based on our analyses and judgments, we modified the core deposit product repricing characteristics and retention periods, as well as average life estimates, used in our interest rate risk modeling which reflects higher interest rate sensitivity of our deposits.

Based on our current simulation modeling assumptions, the following table shows the estimated impact of an immediate change in interest rates as of September 30, 2014 and December 31, 2013.

Analysis of Net Interest Income Sensitivity
(Dollars in thousands)
 
 
 
Immediate Change in Rates
 
 
-50
 
+50
 
+100
 
+200
 
+300
September 30, 2014
 
 
 
 
 
 
 
 
 
Dollar change
 
$
(17,315
)
 
$
17,968

 
$
33,262

 
$
65,600

 
$
97,834

Percent change
 
-4.0
 %
 
4.2
%
 
7.7
%
 
15.2
%
 
22.7
%
December 31, 2013
 
 
 
 
 
 
 
 
 
 
Dollar change
 
$
(6,961
)
 
$
14,815

 
$
27,594

 
$
57,644

 
$
89,663

Percent change
 
-1.8
 %
 
3.7
%
 
6.9
%
 
14.5
%
 
22.5
%

The table above illustrates the estimated impact to our net interest income over a one-year period reflected in dollar terms and percentage change. As an example, if there had been an instantaneous parallel shift in the yield curve of +100 basis points on

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September 30, 2014, net interest income would increase by $33.3 million or 7.7% over a twelve-month period, as compared to a net interest income increase of $27.6 million, or 6.9%, if there had been an instantaneous parallel shift of +100 basis points at December 31, 2013. The increase in the overall interest rate asset sensitivity at September 30, 2014 compared to December 31, 2013, is primarily due to an increase in the interest rate sensitivity of our assets since year end. Rate sensitive assets, particularly loans indexed to short term rates and Fed Funds, increased during the nine months ended September 30, 2014. The increase was funded by less rate sensitive liabilities, primarily deposits. Though modification of assumptions and continued expansion of the hedging program partially offset increases in sensitivity, overall asset sensitivity still increased during 2014 due to asset and liability compositional changes. Based on the modeling, the Company remains in an asset sensitive position and would benefit from a rise in interest rates. We will continue to periodically review and refine, as appropriate, the assumptions used in our interest rate risk modeling.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report (the "Evaluation Date"), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2014, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In June 2013, we were served with a complaint naming the Bank as an additional defendant in a lawsuit pending in the Circuit Court of the 21st Judicial Circuit, Kankakee County, Illinois known as Maas vs. Marek et. al. The lawsuit, brought by the beneficiaries of two trusts for which the Bank is serving as the successor trustee, seeks reimbursement of penalties and interest assessed by the IRS due to the late payment of certain generation skipping taxes by the trusts, as well as certain related attorney fees and other damages. The other named defendants include legal and accounting professionals that provided services related to the matters involved. In January 2014, the Circuit Court denied the Bank’s motion to dismiss, and the matter is now in the discovery process. Although we are not able to predict the likelihood of an adverse outcome, we currently anticipate that ultimate resolution of this matter will not have a material adverse impact on our financial condition or results of operations.

As of September 30, 2014, there were various other legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. Management does not believe that the outcome of these proceedings will have, individually or in the aggregate, a material adverse effect on the Company’s results of operations, financial condition or cash flows.

ITEM 1A. RISK FACTORS

Before making a decision to invest in our securities, you should carefully consider the information discussed in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for our fiscal year ended December 31, 2013, regarding our business, financial condition or future results, together with the following discussion that supplements and supersedes in relevant part certain information contained in the Annual Report. You should also consider information included in this report, including the information set forth in Part I, Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cautionary Statement Regarding Forward-Looking Statements."

Following the adoption of the Dodd-Frank Act, banks have been subject to heightened regulatory scrutiny including compliance with consumer protection laws and regulations; failure to satisfy regulatory expectations may subject us to supervisory enforcement actions.

We are subject to extensive supervision, regulation and examination. Bank regulatory authorities have substantial supervisory and enforcement authority to address compliance with applicable laws and regulations (including laws and regulations governing consumer credit, fair lending, privacy, information security and anti-money laundering and anti-terrorism laws). In this regard, there is increasing attention by federal regulatory authorities regarding compliance with consumer lending laws and regulations, particularly with respect to "unfair, deceptive or abusive" acts and practices as well as alleged fair lending violations

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based on claims of disparate treatment or disparate impact on minority groups in connection with consumer lending activities. Failure to comply with laws, regulations, or new consumer protection standards applicable to us or the expectations of our regulators relating to compliance practices could result in regulatory sanctions, civil money penalties or adverse actions against us, which in turn could increase our compliance burden and costs of doing business, restrict our ability to expand our business or result in damage to our reputation.
 
While we have consistently supported our communities through community development lending in low and moderate income areas across our assessment areas, through investments in affordable housing initiatives including affordable home loans, through financial contributions to community groups and through significant volunteer service by our employees and management teams, our residential lending volume in certain communities during 2010 through 2012 was lower than expectations. In response, we have created a dedicated community lending team and have invested in expanded marketing and advertising to strengthen our mortgage lending outreach to underserved borrowers and communities across our market areas. As a result of these efforts, we have improved our direct residential mortgage lending activity in the targeted markets and we continue to focus on enhancing our community lending efforts and fair lending compliance programs. We do not anticipate that the costs of our actions to address these issues will be material to our financial results. While we are committed to maintaining effective compliance programs that satisfy regulatory expectations, we could be subject to supervisory enforcement action, including potential civil money penalties, in light of past lending activity. Although not material to the execution of our current business plans or organic growth strategy, we would need to resolve regulatory concerns before pursuing mergers or acquisitions or other expansion that requires prior regulatory approval.

The Federal Reserve has implemented significant economic strategies that have impacted interest rates, inflation, and the shape of the yield curve.

During the last few years, the Federal Reserve has been involved in a series of domestic monetary policy initiatives in response to economic conditions, including the purchase of U.S. treasury securities commonly known as “quantitative easing” (“QE”). Among other things, quantitative easing strategies are intended to create or maintain a low interest rate environment and to stimulate economic activity, and have caused interest rates to be lower than they would have been without such involvement. The Federal Reserve has been gradually tapering off the program since mid-2013, and has indicated that QE will be phased out in the fourth quarter of 2014. The impact of a reduction or the end of QE is a source of ongoing uncertainty because it may have an impact on the level and direction of interest rates, the level and cost of deposits and liquidity levels in the financial system in general and the banking system in particular, which may disrupt financial markets and could adversely impact the level and cost of our deposits, the value of our investment securities portfolio or general economic conditions. In addition, we expect there will continue to be significant competition for deposits which may also impact our cost of deposits. A sharp movement up or down in interest rates could have a significant, adverse impact on our operating results. See also “Risk Factors - We may be adversely affected by interest rate changes or an extended period of continued low interest rates” in our 2013 Annual Report on Form 10-K.

The success of our business is dependent on ongoing access to sufficient and cost-effective sources of liquidity.

We depend on access to a variety of funding sources to provide sufficient liquidity to grow our loan portfolio, meet our lending commitments and other business needs and accommodate the transaction and cash management needs of our clients, including client draws on unused lines of credit. We had a total of $5.6 billion of unfunded commitments to extend credit, including obligations to issue letters of credit, as of September 30, 2014. It is difficult to predict when clients may draw on such commitments or the impact such draws may have on our liquidity needs. Our deposit base is relatively concentrated in large commercial relationships. The loss of large client relationships could negatively impact our liquidity. At September 30, 2014, we had 21 client relationships with greater than $75 million in deposit balances and our ten largest depositor accounts totaled $2.0 billion, or 15% of total deposits. Currently, our primary sources of liquidity are client deposits, large institutional deposits, and wholesale market-based borrowings, including brokered deposits. In addition to on-balance sheet liquidity and funding, we maintain access to various external sources of funding. These external sources of funding include Federal Funds counterparty lines with unaffiliated banks, repurchase agreements, the discount window at the Federal Reserve Bank, Federal Home Loan Bank ("FHLB") borrowings and the brokered deposit market. Our ability to access these external sources depends on availability in the market place and a number of factors such as counterparty relationship strength in the case of Federal Funds counterparty lines and repurchase agreements or the availability of loans eligible for pledging as collateral as required under the Federal Reserve's and the FHLB's lending arrangements (e.g., stipulations of documentation requirements, credit quality, payment status and other criteria). If our primary sources of liquidity are insufficient and we are unable to adequately access external sources, we may be required to increase our on−balance sheet liquidity and funding by accessing the capital markets, which may not be cost effective or may have a dilutive effect on our shareholders.


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Also, the federal banking agencies have proposed new liquidity standards that could result in our having to lengthen the term of our funding, restructure our business lines by forcing us to seek new sources of liquidity, and/or increase our holdings of liquid assets. As part of the Basel III capital process, the Basel Committee on Banking Supervision has finalized a new liquidity standard, a liquidity coverage ratio (“LCR”), which requires a banking organization to hold sufficient "high quality liquid assets" to maintain adequate liquid assets to meet potential funding needs for a 30 calendar day liquidity stress scenario. Although the proposal will not apply directly to us because we have less than $50 billion in assets, the substance of the proposal may inform the regulators' assessment of our liquidity, and may cause secondary impact in the markets in which we actively participate as well as the competitive environment, including the pricing for deposits, in which we operate. We could be required to reduce our holdings of illiquid assets and increase our level of core deposits, which may adversely affect our operating results and financial condition.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table summarizes the Company's monthly common stock purchases during the quarter ended September 30, 2014, which are solely in connection with the administration of our employee share-based compensation plans. Under the terms of these plans, we accept shares of common stock from plan participants if they elect to surrender previously-owned shares upon exercise of options to cover the exercise price or, in the case of both restricted shares of common stock and stock options, the withholding of shares to satisfy tax withholding obligations associated with the vesting of restricted shares or exercise of stock options.

Issuer Purchases of Equity Securities
 
 
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 Plan or Programs
July 1 - July 31, 2014
616

 
$
29.87

 
—

 
—

August 1 - August 31, 2014
252

 
28.44

 
—

 
—

September 1 - September 30, 2014
213

 
30.05

 
—

 
—

Total
1,081

 
$
29.57

 
—

 
—


Unregistered Sale of Equity Securities

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.


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ITEM 6. EXHIBITS
 
Exhibit
Number
Description of Documents
3.1
Restated Certificate of Incorporation of PrivateBancorp, Inc., dated August 6, 2013 is incorporated herein by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q (File No. 001-34006) filed on August 7, 2013.
 
 
3.2
Amended and Restated By-laws of PrivateBancorp, Inc. are incorporated herein by reference to Exhibit 3.5 to the Annual Report on Form 10-K (File No. 001-34066) filed on March 1, 2010.
 
 
3.3
Amendment to Amended and Restated By-laws of PrivateBancorp, Inc., is incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-34066) filed on May 24, 2013.
 
 
4.1
Certain instruments defining the rights of the holders of certain securities of PrivateBancorp, Inc. and certain of its subsidiaries, none of which authorize a total amount of securities in excess of 10% of the total assets of PrivateBancorp, Inc. and its subsidiaries on a consolidated basis, have not been filed as exhibits. PrivateBancorp, Inc. hereby agrees to furnish a copy of any of these agreements to the Securities and Exchange Commission upon request.
 
 
4.2
Form of Preemptive and Registration Rights Agreement dated as of November 26, 2007 is incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 001-34066) filed on November 27, 2007.
 
 
4.3
Amendment No. 1 to Preemptive and Registration Rights Agreement dated as of June 17, 2009 by and among PrivateBancorp, Inc., GTCR Fund IX/A, L.P., GTCR Fund IX/B, L.P., and GTCR Co-Invest III, L.P., is incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K (File No. 001-34066) filed on June 19, 2009.
 
 
11
Statement re: Computation of Per Share Earnings - The computation of basic and diluted earnings per share is included in Note 12 of the Company’s Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" of this report on Form 10-Q.
 
 
12 (a)
Statement re: Computation of Ratio of Earnings to Fixed Charges.
 
 
15 (a)
Acknowledgment of Independent Registered Public Accounting Firm.
 
 
31.1 (a)
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2 (a)
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32 (a) (b)
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
99 (a) (b)
Report of Independent Registered Public Accounting Firm.
 
 
101 (a)
The following financial statements from the PrivateBancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed on November 7, 2014, formatted in Extensive Business Reporting Language (XBRL): (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.
(a) 
Filed herewith.
 
 
(b) 
This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.


106

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
 
PrivateBancorp, Inc.
 
/s/ Larry D. Richman
Larry D. Richman
President and Chief Executive Officer
 
  /s/ Kevin M. Killips
Kevin M. Killips
Chief Financial Officer and Principal Financial Officer

Date: November 7, 2014


107