10-K 1 pvtb1231201610-k.htm 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
[X]
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
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
privatebancorplogo3qa01.jpg
Delaware
 
36-3681151
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
120 South LaSalle Street
Chicago, Illinois 60603
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (312) 564-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
 
Common Stock, No Par Value
 
Nasdaq Global Select Stock Market
 
10% Trust Preferred Securities of PrivateBancorp Capital Trust IV
 
Nasdaq Global Select Stock Market
 
7.125% Subordinated Debentures due 2042
 
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ].
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X].
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 [X] 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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ].
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 [X] 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 Act).Yes [ ] No [X].
The aggregate market value of the registrant’s outstanding voting and non-voting common stock held by non-affiliates on June 30, 2016, determined using a per share closing price on that date of $44.03, as quoted on The Nasdaq Stock Market, was $3,446,864,642.
As of February 27, 2017, there were 80,026,661 shares of the issuer’s voting common stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be disclosed pursuant to Part III of this report either shall be: (i) deemed incorporated by reference from selected portions of the Registrant’s definitive proxy statement for its 2017 Annual Meeting of Stockholders, if such proxy statement is filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of Registrant’s fiscal year; or (ii) included in an amendment to this report filed with the Commission on a Form 10-K/A not later than the end of such 120 day period.
 


FORM 10-K
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

PART I
 
ITEM 1. BUSINESS

Overview

PrivateBancorp, Inc. (“PrivateBancorp” or the “Company” and, together with its consolidated subsidiaries, “we,” “our” or “us”), a Delaware corporation incorporated in 1989, is a Chicago-based bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company is the holding company for The PrivateBank and Trust Company (“PrivateBank” or the “Bank”), an Illinois-chartered bank founded in Chicago in 1991.

Through the Bank, we provide customized business and personal financial services to middle market companies, as well as business owners, executives, entrepreneurs and families in the markets and communities we serve. As of December 31, 2016, we had total assets of $20.1 billion, including total loans of $15.1 billion, total deposits of $16.1 billion and total stockholders’ equity of $1.9 billion and operated out of 36 offices located in 13 states, including 23 full-service banking office locations in four states. Our full-service bank branches are located principally in the greater Chicago metropolitan area, with additional branches in the St. Louis, Milwaukee and Detroit metropolitan areas. We have non-depository commercial banking offices strategically located in major commercial centers to further our reach with our core client base of middle market companies.

Pending Transaction with Canadian Imperial Bank of Commerce

On June 29, 2016, the Company entered into a definitive merger agreement with Canadian Imperial Bank of Commerce (“CIBC”), a Canadian chartered bank, and CIBC Holdco Inc. (“Holdco”), a newly-formed Delaware corporation and a direct, wholly owned subsidiary of CIBC, which contemplates that the Company will merge with and into Holdco, with Holdco surviving the merger. Closing of the transaction remains subject to the receipt of required regulatory and stockholder approvals and other customary closing conditions. Following the merger, the Bank will be headquartered in Chicago, Illinois, retain its Illinois state banking charter and be an indirect, wholly owned subsidiary of CIBC.

If approved by our stockholders, under the terms of the definitive agreement, at the effective time of the merger, shareholders of the Company would have the right to receive $18.80 in cash and 0.3657 of a CIBC common share for each outstanding share of PrivateBancorp common stock. Based on the closing price of CIBC common shares on the NYSE as of February 27, 2017, of $90.04, total consideration for the transaction is valued at approximately $4.1 billion, or $51.73 per share of Company common stock. The actual transaction value would be based on the number of shares of common stock of the Company outstanding at the closing and the price of CIBC common stock as of the closing.

The full text of and additional information about the definitive merger agreement is included in the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission (“SEC”) on July 6, 2016.

Our Vision and Strategy

Our vision is to be the premier commercial bank in the Midwest and profitably and responsibly grow our business while maintaining a strong asset quality profile. Our goal is to develop meaningful long-term full banking relationships with our clients by delivering high-touch service and customized product solutions across our platform. We are a Chicago-based bank that serves commercial clients across the country. Our seasoned banking teams serve our clients through a relationship-based approach to deliver banking and wealth management solutions to meet our clients’ comprehensive needs. Due to our commercial focus and relationship-based model, we currently operate with a significantly smaller branch network than banks of generally comparable size, and we offer commercial banking products, services and expertise that enable us to compete with larger banks for middle market commercial clients.

Our business has transformed and grown significantly over the past decade since we hired a substantial group of senior commercial middle market banking executives, including our CEO, from a large Chicago-based financial institution that, at the time, recently had been acquired by a global money center bank. We initially raised a substantial amount of private equity capital to support growth under the new leadership team and invested in adding a significant number of senior commercial bankers and other professionals needed to support the expected new business. As illustrated by the chart below, over the past decade, we have significantly expanded our business, growing our total loans from $4.2 billion at year end 2007 to $15.1 billion at year end 2016, a compounded annual growth rate of 15% over that period, and successfully transformed from a commercial real estate and construction-focused lender to a more comprehensive commercial bank with approximately two-thirds of our loan portfolio comprised of commercial loans (i.e., commercial and industrial loans and owner-occupied commercial real estate):

3

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In addition to our large commercial banking business, we also have community banking and private wealth capabilities to meet our clients’ comprehensive needs and serve our markets and communities. We place significant emphasis on leveraging our high-touch, relationship-based approach to cross-sell products and value-added services to our clients, such as delivering:

•
treasury management services to our commercial borrowers, which generates non-interest fee income and serves as an important source of stable, cost-effective deposits that we use to fund loan growth;
•
interest rate and foreign currency risk management solutions to our commercial borrowers through our capital markets business;
•
private banking and wealth management services to owners and executives of our commercial clients;
•
consulting, advisory, custodial and trustee services to qualified and nonqualified retirement plans sponsored by our commercial clients; and
•
personal banking products and residential mortgages to employees of our commercial clients.

Our growth strategy is primarily focused on organic growth across our lines of business and, since implementation of our strategic transformation, most of our growth has been organic and, over the past several years, through reinvesting most of our earnings in our business. In addition to our focus on cross-selling products and services to our existing clients and acquiring new clients through referrals and business development efforts, we have, as part of our organic growth strategy, expanded our business by recruiting experienced banking professionals with specialized industry expertise and relationships. A strategic priority for us, particularly given our limited retail branch network, has been expanding our stable core deposit gathering capabilities and diversifying our overall funding base to continue supporting organic loan growth over the long term.  To address this strategic priority, in recent years we have considered various potential strategies to diversify our funding base, including potential acquisitions of retail banking franchises and other business initiatives.  In June 2016, we agreed to a strategic combination with CIBC, which would result in us becoming part of a larger, financially strong North American organization and enhancing our sources of diversified, stable funding.

Our Business

We operate Commercial Banking, Community Banking and Private Wealth businesses and seek to generate loans and fee income, gather deposits and cross-sell products and services through each business. At the corporate level, we manage our investment portfolio, hedging activities, funding and liquidity, including the supplementing of deposits generated through our lines of business.

Commercial Banking

Our Commercial Banking business focuses on the specific needs of middle market companies and serves a broad range of industries, such as manufacturing, transportation, wholesale distribution, retail and certain specialty industries discussed below. Our Commercial Banking business also includes our Commercial Real Estate group, which serves the needs of professional real estate investors and developers, and our professionals focusing on specialized industries and products, such as healthcare, finance and insurance, construction and engineering services, security alarm finance and asset-based lending. We primarily target commercial clients with approximately $10 million to $2 billion in annual revenue, although the majority of our clients generate between $20 million and $500 million annually.


4

Due to our history and presence in Chicago, as well as the long-standing relationships that many of our senior executives and commercial bankers have here, our largest geographic market is the Chicago metropolitan area and surrounding areas in Illinois. Over the past decade, we have expanded our reach beyond Chicago and Illinois by establishing a National Commercial Banking group within our Commercial Banking business and opening several commercial banking offices in major commercial centers to build our brand, diversify our geographical exposure and expand our reach with our core client base. In addition to our bank branches in the Chicago metropolitan areas, we also conduct our banking business through branches in the St. Louis, Milwaukee and Detroit metropolitan areas and through commercial banking offices in Atlanta, Georgia; Cleveland, Ohio; Denver, Colorado; Miami, Florida; Des Moines, Iowa; Grand Rapids, Michigan; Indianapolis, Indiana; Kansas City, Missouri; Minneapolis, Minnesota; Pittsburgh, Pennsylvania; and Stamford, Connecticut. We may open additional commercial banking offices in other major commercial centers in the future to continue expanding our geographic reach and growing our Commercial Banking business.

Our Commercial Banking business also encompasses our Treasury Management, Loan Syndications and Capital Markets groups. A general overview of these groups, as well as the products and services delivered by our Commercial Banking teams, is set forth below.

Commercial Loans. We offer commercial borrowers revolving lines of credit for working capital needs, term loans to finance expansion, acquire inventory or equipment or otherwise support growth, and standby and performance letters of credit to facilitate transactions with trading partners. Included in our commercial loans are loans secured at least in part by non-residential owner-occupied commercial real estate where the cash flows from the borrowers’ business, as opposed to cash flows from the real estate itself, serve as the primary source of loan repayment. Also included within our commercial loans are leveraged loans, which are primarily underwritten on the recurring cash flow and earnings of the borrower, typically to finance leveraged buyouts, add-on acquisitions, recapitalizations and other strategic initiatives, and generally have higher debt-to-earnings ratios compared to other commercial loans.

At December 31, 2016, we had a $9.6 billion commercial loan portfolio, which comprised 64% of our total loan portfolio. We believe our commercial loan portfolio is well diversified among borrowers, industries and geographies. The average note size of our commercial loans is approximately $3.8 million, although given the nature of our business, we also have many significantly larger commercial loan relationships, including some that exceed $25 million.

As part of our Commercial Banking business, our relationship managers also source syndicated lending opportunities arranged by other banks in which we participate in a non-lead capacity, particularly in situations where we have a pre-existing relationship with the borrower and/or its principals or have an opportunity to cross-sell other products and services to them. Of our $15.1 billion in total loans outstanding at December 31, 2016, $3.0 billion, or 20%, were syndicated loans for which we were a non-lead participant; of this $3.0 billion, $2.2 billion were Shared National Credits (“SNCs”), which are loan transactions of at least $20 million that are shared by three or more regulated depository institutions. The SNCs in which we have participated in a non-lead role typically are led by one or more of the global money center banks or large super regional banks.

Commercial Real Estate Loans. We offer professional real estate investors and developers credit solutions for the construction, acquisition, redevelopment and refinancing for major core property types, including office, industrial, retail, multi-family, student housing and for-sale housing. We provide financing opportunities for privately-held, entrepreneurial real estate companies as well as for REITs and other institutional real estate clients. We generally are a short- and medium-term lender for commercial real estate properties. The majority of our investor and developer clients are based within our geographic footprint, although the properties financed for them may be located in other regions. Our commercial real estate specialists are located in the Chicago, Illinois; Atlanta, Georgia; Cleveland, Ohio; Denver, Colorado; Detroit, Michigan; Milwaukee, Wisconsin; Minneapolis, Minnesota; and St. Louis, Missouri markets. At December 31, 2016, we had a $4.1 billion commercial real estate portfolio (exclusive of construction loans) and a $418.0 million construction portfolio, which comprised 27% and 3%, respectively, of our total loan portfolio. The average note size of our commercial real estate loans is approximately $5.4 million, although as noted above, we also have many significantly larger credit relationships in our commercial real estate business.

Specialized Industries and Products. Within our Commercial Banking business, we have several teams of commercial bankers that focus on a particular industry or a specific product offering that can be offered across industries. These specialty banking teams employ relationship managers with relevant industry experience and/or specialized product knowledge in order to provide tailored banking solutions to fit the unique needs of clients in certain industries or offer sophisticated lending products to commercial borrowers. We believe that having banking professionals with expertise in and a focus on specialized industries and products enables us to build stronger relationships with clients and better serve their unique banking needs.

Our largest industry specialty is our healthcare team. We employ experienced healthcare industry professionals who understand the industry’s unique challenges and regulatory framework and the numerous healthcare sub-markets. We have a particular focus on the senior care sector, including independent, assisted living and skilled care/nursing facilities. Lending relationships in this

5

industry group are primarily with for-profit borrowers and the average size of the credit relationship per borrower tends to be larger compared to our non-specialty commercial lending portfolio. As of December 31, 2016, we had a $2.0 billion healthcare loan portfolio, which represented 21% of our commercial loan portfolio and 13% of our total loan portfolio. We also have professionals specializing in the following industries and products:

•
Finance and Insurance Industry - focus on the needs of clients in the finance and insurance industry generally, with particular emphasis on a number of specific industries and product types, such as the following:
◦
Capital Call Bridge Loans to Private Equity Funds - providing lines of credit to private equity funds secured by limited partner capital commitments, which provide temporary liquidity as a “bridge” to the next investor capital call
◦
Specialty Finance - providing loans to nonbank specialty finance lenders that provide various types of financing, such as consumer financing, auto financing, equipment financing or other types of asset-based lending
◦
Financial Institutions - providing depository, cash management and lending products and services to community banks, financial sponsors, hedge funds, asset managers and futures commission merchants (“FCMs”);
•
Construction and Engineering Industry - focuses on the needs of engineering firms, construction contractors (general, prime, sub and specialty) and building material suppliers;
•
Security Alarm Industry - focuses on companies engaged in providing security and medical alert services;
•
Asset-Based Lending - structure and originate lending solutions secured by a specific pool of assets, such as receivables, inventory or equipment, for commercial clients across a variety of industries; and
•
Structured Finance - collaborate with our commercial banking relationship managers across a variety of industries to deliver leveraged financial solutions, such as loans underwritten according the quality of the client’s free cash flows, to our commercial clients.

Treasury Management. We have a team of treasury management professionals that work with our commercial banking relationship managers to deliver comprehensive treasury management solutions for our commercial clients to manage their cash and liquidity needs. We offer receivables solutions, such as remote capture and wholesale lockbox services, payables solutions, reporting, reconciliation and data integration solutions and deposit account and investment options for optimizing earnings on excess cash balances.

As a commercial-focused bank, our largest source of deposits is our commercial client base and, accordingly, we actively cross-sell our treasury management products and services to our commercial clients and focus on lending relationships where we believe we have an opportunity to acquire deposits and provide treasury management products and services. We offer our commercial clients an earnings credit rate, which reduces the amount of treasury management fees charged to a client based on the average balance maintained by the client in noninterest-bearing deposit accounts. As of December 31, 2016, approximately 75% of our commercial clients had a treasury management relationship with us. For the year ended December 31, 2016, treasury management was our largest source of non-interest income at $33.9 million, or 23%, of total non-interest income.

Loan Syndications. We have a loan syndications team that generates fee revenue by arranging for other lenders to participate in a loan transaction either at a borrower’s request or in connection with us strategically managing the composition of our loan portfolio to, among other things, mitigate our risk exposure to a single borrower, transaction or industry. In larger lending transactions, we may arrange loans on a best-efforts basis (in which we commit to extend only a portion of the total commitment, pro rata with other lenders, and the borrower obtains the full credit request only if the syndications team arranges sufficient commitments from other lenders or investors) or we may fully underwrite credit facilities (in which we commit to lend the full credit facility to the client and, following the initial closing, syndicate portions of that credit to other lenders). In this way, syndications allow us to structure, and serve as the lead arranger for lending transactions that we may not otherwise be able to participate in, as we are able to reduce our credit exposure to the client relationship and/or decrease loan concentrations by industry, type or size. Serving as the lead for these lending transactions may enhance our ability to retain or acquire the deposit and treasury management relationship and obtain future business from the borrower. In 2016, our syndications team generated $21.0 million, or 14%, of total non-interest income. We syndicate both commercial loans (68% of syndication fees in 2016) and commercial real estate loans (32% of syndication fees in 2016). As of December 31, 2016, of our $15.1 billion in total loans outstanding, we had $2.5 billion of retained balances from syndicated loan transactions for which we serve as the lead or co-lead.

Capital Markets. We have a team of capital markets professionals that work with our commercial banking relationship managers to assist our commercial clients with their risk management objectives by offering a suite of interest rate and foreign currency hedging solutions. Our interest rate management products, such as interest rate swaps, caps, floors, collars and swaptions, assist our borrower clients in protecting themselves from unexpected interest rate movements, achieving predictable debt service payments and balancing their mix of fixed and floating-rate debt. To assist clients with their management of foreign currency

6

transactions, we offer foreign currency wire transfers and facilitate collection of foreign currency drafts and checks, and to assist with their management of currency fluctuations, we offer foreign exchange forwards, window forwards, swaps and options. We also provide foreign currency risk management services to clients, such as developing foreign exchange policies and providing research. For the year ended December 31, 2016, our capital markets group generated $25.3 million, or 17%, of total non-interest income.

Community Banking

Our Community Banking business serves the personal, residential mortgage and small business banking needs of consumers and small businesses through our bank branches. Our Community Banking business is focused primarily on the Chicago metropolitan area, where most of our bank branches are located.

Retail Banking. Through a network of 23 full-service banking office locations, of which 20 are in Chicago and its surrounding communities, we provide traditional personal banking and investment products and services, including checking, savings and money market deposit accounts, certificates of deposit (“CDs”), health savings accounts, and personal lending products, such as home equity loans and lines of credit, auto loans (primarily for used cars), secured and unsecured loans (often used to fund educational costs or consolidate debt) and overdraft protection loans. We also offer retail deposit products through The Palladian PrivateBank, our online banking portal.

Residential Mortgage Banking. We offer a full range of residential mortgage loans for purchasing or refinancing one- to four-family residential properties, primarily through a correspondent model in which we originate loans for sale in the secondary market based on the underwriting standards of third-party investors and transfer servicing rights together with the sale of the loan. In certain cases, we retain originated mortgage loans for our portfolio, primarily jumbo and nonconforming loans. We currently do not service loans for other entities. We have residential mortgage origination teams in the Chicago, St. Louis, Milwaukee and Detroit markets to serve the residential mortgage needs of the communities in which we have bank branches. As of December 31, 2016, we employed 24 residential mortgage loan originators. During 2016, we originated and sold approximately $485.4 million of first mortgage loans, which generated $15.9 million, or 11%, of total non-interest income.

Small Business Banking. Our small business banking group focuses primarily on businesses with less than $10 million of revenue and their owners, as well as non-profit organizations. This group operates primarily through a Chicago-based team in our network of branch office locations and offers loans, deposits and treasury management products and services similar to those of our Commercial Banking business, but on a smaller scale. Because of the smaller size of businesses served by this group as compared to our Commercial Banking business, small business loans are generally underwritten based in part on the credit of the individual owners. We also are a participating lender in U.S. Small Business Administration loan programs. Consistent with our strategy of cross-selling products and services, we seek to identify opportunities for referring individual owners of our small business clients to our Private Wealth business and its dedicated team of private bankers.

Private Wealth

Our Private Wealth business provides private banking and financial advisory, trustee, and asset management services to high net-worth individuals (generally those with more than $1 million of investable assets) and asset management and retirement plan services to for-profit and not-for-profit corporate/institutional clients. We offer our Private Wealth services mostly in the Chicago market and from our banking offices in the St. Louis, Milwaukee and Detroit markets, where we have full-service Private Wealth teams. Consistent with our relationship-based model and focus on cross-selling products and services to our clients, our Private Wealth business places a particular emphasis on servicing our commercial banking clients and their owners and executives. As of December 31, 2016, approximately 23% of our commercial clients had a relationship with our Private Wealth business. The products and services offered to our Private Wealth clients include the following:

•
Private Banking and Financial Advisory - Our private banking team delivers a full range of banking solutions to high net-worth individuals, including deposits, loans and lines of credit for personal, business and investment purposes, such as residential secured loans, lines secured by investment securities and other secured and unsecured lines of credit. We also assist clients with financial planning needs around life events such as retirement or education.
•
Trustee Services - Our trust department serves as corporate custodian and/or trustee for a variety of personal trusts and retirement plans and provides other custodial, guardianship/conservatorship and estate administration services. We also offer escrow services for business transactions and legal settlements, qualified intermediary services for tax-deferred real estate transactions and “qualified custodian” services for clients who are holding assets on behalf of their clients.

7

•
Asset Management - Our asset management team provides investment management services to individual and corporate/institutional clients, which involves creating asset allocation strategies for each client’s particular situation while using third-party investment managers to execute these strategies.
•
Corporate Retirement Plan Services - Our trust and asset management teams provide consulting, advisory, custodial and trustee (either directed or full/discretionary) services to qualified and nonqualified retirement plans sponsored by our commercial clients.

Custody and escrow services involve safeguarding and administering client assets but do not involve providing investment management services. These assets are considered to be “non-managed” assets under management and administration (“AUMA”) and have a significantly lower fee structure than “managed” AUMA, which are assets for which we provide investment management services. As of December 31, 2016, we had total AUMA of $9.7 billion from which we generated $21.1 million of non-interest income, 89% of which was attributable to managed AUMA.

Deposit Generating Activities

We rely on a relationship-based approach to generate deposits through our Commercial Banking, Community Banking and Private Wealth businesses. Generating core deposits is one of our key strategic objectives for our lines of business, as deposits serve as our primary source of funding for loan growth. Given the commercial focus of our business, a majority of our deposit base is comprised of commercial accounts, which typically have larger average deposit balances than retail accounts. As of December 31, 2016, approximately 70% of our deposits were attributable to accounts managed in our Commercial Banking business, including certain non-traditional commercial deposits discussed below.

An important source of deposits for us are cash sweep programs operated by broker-dealers (“BDs”) with which we have entered into a contract to serve as a program bank. The contracts governing our participation as a program bank have a specified term, set forth the pricing terms for the deposits and generally provide for minimum and maximum deposit levels that the BDs will have with us at any given time. We believe these cash sweep program deposits provide a stable, cost-effective source of funding. The regulatory definition of “brokered deposits,” however, includes any non-proprietary funds deposited, or referred for deposit by a third party. As a result, our cash sweep program deposits are classified for regulatory purposes as brokered deposits. We refer to these and other similar deposits as “non-traditional” brokered deposits to distinguish them from traditional brokered time deposits that are acquired through deposit brokers in the wholesale market.

We also maintain access to a number of wholesale funding sources, including traditional brokered time deposits, which we use, as needed, to supplement our funding sources and manage liquidity. Over the past decade, as part of our strategic plan to transition to a middle market focused commercial bank, we have significantly reduced our reliance on traditional brokered time deposits.

We have a relatively small number of commercial depositors that maintain substantial balances with us (including BDs for which we serve as a cash sweep program bank), resulting in concentrations of large deposits. The table below provides detail on our large deposit relationships, a significant portion of which are financial services-related businesses. The amount of large deposits classified as brokered provided in the table below are primarily cash sweep program deposits.

Large Deposit Relationships
(Dollars in thousands)
 
December 31,
 
2016
 
2015
Ten largest depositors:
 
 
 
Deposit amounts
$
2,378,709

 
$
2,229,471

Percentage of total deposits
15
%
 
16
%
Classified as brokered deposits
$
1,399,271

 
$
1,255,315

Deposit Relationships of $75 Million or More:
 
 
 
Deposit amounts
$
4,383,939

 
$
3,247,548

Percentage of total deposits (all relationships)
27
%
 
23
%
Percentage of total deposits (financial services businesses only)
15
%
 
15
%
Number of deposit relationships
31

 
22

Classified as brokered deposits
$
2,284,536

 
$
1,752,329



8

For information regarding our deposits, see “Funding and Liquidity Management” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and Note 8 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

Investment and Hedging Activities

We maintain a managed investment securities portfolio intended to provide liquidity, maximize risk-adjusted total return, and provide a means to modify our asset/liability position as deemed appropriate. We invest primarily in collateralized mortgage obligations and residential and commercial mortgage-backed securities issued or guaranteed by U.S. Government agencies or U.S. Government-sponsored enterprises, which totaled 72% of our investment portfolio at December 31, 2016. We also invest in bank-qualified tax-exempt obligations of states and local political subdivisions, which totaled 12% of our investment portfolio at December 31, 2016. We also invest in U.S. Treasury and U.S. agency securities. The investment portfolio is one of the tools we use to manage our net asset/liability position in an attempt to mitigate the interest rate risk sensitivity and characteristics of our loan portfolio. For information regarding our investment portfolio, see “Investment Portfolio Management” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and Note 3 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

We also use interest rate derivatives as part of our asset/liability management strategy to hedge interest rate risk in our primarily floating-rate loan portfolio. These interest rate derivatives essentially convert certain floating-rate commercial loans to fixed-rate in order to reduce the variability in forecasted interest cash flows due to market interest rate changes. Depending on market conditions, we may reduce or expand this program and enter into additional interest rate swaps. For more information regarding our use of these cash flow hedges, and the potential impact on interest income and other non-interest income on our consolidated statements of income, see Note 17 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

Competition

We conduct business in the highly competitive financial services industry, which has been and continues to be impacted by significant and increasing government regulation, increasing technological demands and disruption and the presence of many new non-bank competitors. In particular, there is significant competition among commercial banking institutions in the Chicago market, which continues to be a fragmented market with a large number of banking organizations despite significant consolidation over the past decade, and in the broader Midwestern market in which most of our operations and relationships are located. According to the FDIC’s Summary of Deposits as of June 30, 2016 (the most recent date publicly available), there were 208 banking organizations operating in the Chicago metropolitan statistical area (“MSA”). As of such date, we had the seventh highest deposit market share in the Chicago MSA, and the third highest among banking organizations headquartered in the Chicago MSA, at 3.3%. The three largest banking organizations operating in the Chicago MSA (JPMorgan Chase Bank, NA, BMO Harris Bank, NA and Bank of America, NA) collectively had a 46.0% deposit market share.

We compete for loans, deposits, treasury management, wealth management and other financial products and services with community, regional, national, and international commercial banks, thrifts, credit unions, asset-based non-bank lenders, specialty finance companies, consumer finance companies, commercial and residential mortgage banking companies, investment banks, brokerage firms, investment advisors, and other providers of financial products and services. More specifically, with respect to our Commercial Banking business, because our core client base is middle market companies with $10 million to $2 billion of annual revenue, we generally find ourselves competing primarily with super-regional and national commercial banks, asset-based non-bank lenders and commercial mortgage banking companies. Many of these competitors have substantially greater financial resources, lending limits and larger office and branch networks, and greater access to lower cost deposits and capital, than we do and therefore may be able to compete more effectively on loan pricing or terms and/or offer products and services beyond what we offer. Additionally, the non-bank lenders are not subject to the same degree of regulation as that imposed on banking organizations and often are able to structure and price loans more aggressively than us. While we face pressure on loan structure, pricing and other terms for commercial lending relationships, we focus on lending transactions where we currently have, or believe we have the opportunity to develop, a comprehensive banking relationship with the client.

In all of our businesses, we seek to distinguish ourselves through consistent delivery of superior levels of client service, customized solutions and responsiveness expected by our clients rather than competing on price.

We also face competition in attracting and retaining qualified employees. Our ability to continue to compete effectively will depend upon our ability to attract new employees and retain and motivate existing employees, particularly our relationship bankers.

For more information on competition-related and other risks facing the Company, see “Risk Factors” in Item 1A of this Form 10-K.

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Employees

As of December 31, 2016, we employed a total of 1,301 full-time-equivalent employees, which is a significantly smaller employee base than banks of similar size, due in part to our commercial bank model and comparatively small branch network.

Segments

For information regarding our three business segments for financial reporting purposes—Banking (comprised of our Commercial Banking business, Community Banking business and the private banking business within Private Wealth), Asset Management (comprised of the trust and asset management business within Private Wealth) and Holding Company Activities—see “Operating Segments Results” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and Note 21 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10‑K.

Available Information

Our investor relations Internet address is investor.theprivatebank.com. We make available at this address, free of charge, our annual report on Form 10-K, our annual reports to stockholders, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

SUPERVISION AND REGULATION

General

Banking is a highly regulated industry. The following is a summary of certain aspects of various statutes, regulations and supervisory guidance applicable to the Company and our subsidiaries. This summary is not complete, however, and is qualified in its entirety to the applicable statutes and regulations. These statutes and regulations may change, or additional statutes or regulations could be adopted, in the future and we cannot predict what effect, if any, these changes or new statutes or regulations could have on our business or revenues. Following the U.S. federal elections in November 2016, the new Presidential administration and Congress have expressed their desire to significantly reshape the financial regulatory landscape over the next couple of years, which could result in changes to the regulatory framework outlined below. The supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of customers and the banking system in the United States. As such, actions taken by bank regulatory agencies may conflict with or be adverse to the interests of the stockholders of banks and bank holding companies.

PrivateBancorp is registered as a bank holding company with the Board of Governors of the Federal Reserve System (the “FRB”) pursuant to the Bank Holding Company Act of 1956, as amended (the Bank Holding Company Act of 1956, as amended, and the regulations issued thereunder, are collectively referred to as the “BHC Act”), and we are subject to regulation, supervision and examination by the FRB. PrivateBank is an Illinois state-chartered bank and, as such, is subject to supervision and examination by the Illinois Department of Financial and Professional Regulation (the “IDFPR”). As a FRB non-member bank, the Bank’s primary federal regulator is the FDIC.

Bank Holding Company Regulation

Basel III Capital Rules. The capital rules of the FRB and the FDIC applicable to us are referred to as the “Basel III Capital Rules.” These rules, which became effective January 1, 2015, establish a comprehensive capital framework for U.S. banking organizations based on the Basel Committee on Banking Supervision’s December 2010 framework for strengthening international capital standards as well as certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions compared to the prior U.S. risk-based capital rules.

Under the Basel III Capital Rules, the minimum capital ratios that are currently applicable are as follows:

•
4.5% CET1 to risk-weighted assets;
•
6.0% Tier 1 capital to risk-weighted assets;
•
8.0% Total capital to risk-weighted assets; and
•
4.0% Tier 1 capital to average quarterly assets (the “Leverage Ratio”).

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The Basel III Capital Rules also impose a capital component referred to as the “capital conservation buffer,” which is designed to enhance a banking institution’s ability to absorb losses during periods of economic stress by placing restrictions on the institution’s dividends, equity repurchases and discretionary bonus payments to executive officers if the institution does not have capital meeting or exceeding the required buffer. The capital conservation buffer began being phased in on January 1, 2016 and will be fully phased-in as of January 1, 2019. When fully phased-in, the capital conservation buffer will require a banking institution to maintain additional CET1 over the minimum risk-based capital ratios described above, which will result in the following minimum capital ratios to avoid restrictions on dividends, equity repurchases and discretionary bonus payments:

•
7.0% CET1 to risk-weighted assets;
•
8.5% Tier 1 capital to risk-weighted assets; and
•
10.5% Total capital to risk-weighted assets.

Regarding the phase-in schedule, the applicable capital conservation buffer amount as of January 1, 2017 is 1.25% of risk-weighted assets, and will increase by 0.625% each year for the next two years, resulting in full implementation at 2.5% of risk-weighted assets beginning January 1, 2019.

The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1, or all such categories in the aggregate exceed 15% of CET1. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income items are not excluded for purposes of determining regulatory capital ratios; however, non-advanced approaches banking organizations, such as PrivateBancorp and the Bank, were permitted to make a one-time permanent election when the Basel III Capital Rules became effective to continue the approach under the former capital regulations of excluding accumulated other comprehensive income items from regulatory capital. PrivateBancorp and the Bank made this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company’s available-for-sale securities portfolio.

The Basel III Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from being included as Tier 1 capital of bank holding companies, subject to a phase-out period. Trust preferred securities no longer included in an organization’s Tier 1 capital may nonetheless be included as a component of Tier 2 capital on a permanent basis without phase-out. Under the rules, however, for bank holding companies like us that had less than $15 billion in total consolidated assets as of December 31, 2009, trust preferred securities that were issued prior to May 19, 2010 are grandfathered in as a component of Tier 1 capital. Bank holding companies with grandfathered trust preferred securities will become subject to the Tier 1 capital treatment phase-out schedule for other bank holding companies with assets greater than $15 billion at the time of any acquisition that results in post-closing total consolidated assets equal to or greater than $15 billion. The Tier 1 capital treatment of our existing $167.7 million in trust preferred securities is currently grandfathered under the rules, but we believe that the completion of our merger with CIBC will cause our trust preferred securities to lose their Tier 1 capital treatment. Similarly, even if the pending merger with CIBC is not consummated, if we were to pursue balance sheet growth through acquisitions or mergers, our trust preferred securities may lose their Tier 1 capital treatment. In either case, we believe the trust preferred securities may be included as a component of Tier 2 capital.

Implementation of the deductions and other adjustments to CET1 began at 40% on January 1, 2015 and are being phased-in over a four-year period (an additional 20% was added on July 1, 2016 and an additional 20% will be added in the following two years).

The Basel III Capital Rules also revised the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act (the “FDI Act”), which are applicable to the Bank. Specifically, under the Basel III Capital Rules, to be deemed to be “well-capitalized” for prompt corrective action purposes, an institution must meet the following minimum ratios:

•
6.5% CET1 to risk-weighted assets;
•
8.0% Tier 1 capital to risk-weighted assets;
•
10.0% Total capital to risk-weighted assets; and
•
5.0% Leverage Ratio.

Please see the “Capital Requirements and Prompt Corrective Action” section below for more information.


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The well-capitalized thresholds described above for the Bank are also relevant to the Company’s capital ratios on a consolidated basis, as the FRB’s Regulation Y provides that well-capitalized bank holding companies are entitled to certain exemptions and expedited processing for certain requested corporate transactions. Additionally, in the current regulatory environment, a bank holding company may be unable to obtain regulatory approval for a proposed acquisition or merger if it is not well-capitalized and will not be well-capitalized on a pro forma basis.

The Basel III Capital Rules prescribe a standardized approach for risk weightings depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures.

Under its current capital adequacy guidelines, the FRB emphasizes that the foregoing standards are supervisory minimums and that banking organizations generally are expected to operate above the minimum ratios. These guidelines also state that banking organizations experiencing growth, whether internally or by making acquisitions, are expected to maintain strong capital positions substantially above the minimum levels. The FRB may also require a banking organization to maintain capital above the minimum levels based on factors such as the organization’s financial condition or anticipated growth, or perceived risk profile of its statement of financial condition.

As of December 31, 2016, PrivateBancorp and the Bank satisfied all capital adequacy requirements under the Basel III Capital Rules, including the capital conservation buffer on a fully phased-in basis, with a 9.83% CET1 to risk-weighted assets ratio, a 10.73% Tier 1 capital to risk-weighted assets ratio, a 12.49% total capital to risk-weighted assets ratio and a 10.28% Leverage Ratio.

Liquidity Requirements

Historically, the regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. Liquidity risk management has become increasingly important since the financial crisis. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements are expected to incent banking entities subject to these tests to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source.

The federal bank regulators have adopted final rules implementing the LCR, which is applicable only to banking organizations with total consolidated assets of $250 billion or more or on-balance sheet foreign exposure of $10 billion or more. Organizations with $50 billion or more in total assets are subject to a “modified” LCR with less stringent requirements. The LCR generally requires these large financial firms to hold levels of liquid assets sufficient to protect against constraints on their funding during times of financial turmoil. While the LCR technically only applies to these larger banking organizations and not to PrivateBank due to our size, certain elements are expected to filter down to all insured depository institutions through the supervisory process. Similarly, although the rules proposed by the federal bank regulators to implement the NSFR do not apply to organizations, such as PrivateBank, with less than $50 billion in total assets, certain elements of those rules, if adopted as final rules, can be expected to filter down to all insured depository institutions through the supervisory process.

Source of Strength. In accordance with longstanding policy of the FRB, which was codified by the Dodd-Frank Act, a bank holding company is expected to act as a source of financial and managerial strength to its banking subsidiaries and commit resources to support them. The FRB takes the position that in implementing this policy, it may require a bank holding company to provide financial support to its subsidiaries at times it deems appropriate.

Acquisitions and Activities. The BHC Act requires prior FRB approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. With limited exceptions, the BHC Act prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or performing services for its authorized subsidiaries. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities that the FRB has determined, by regulation or order, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto, such as owning and operating a savings association, performing functions or activities that may be performed by a trust company, owning a mortgage company,

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or acting as an investment or financial advisor. The FRB, as a matter of policy, may require a bank holding company to be well-capitalized at the time of filing an acquisition application and upon consummation of the acquisition and will consider the pro forma impact of the proposed transaction on capital adequacy.

The Gramm-Leach-Bliley Act allows bank holding companies that are in compliance with certain requirements to elect to become “financial holding companies.” Financial holding companies may engage in a broader range of activities than is otherwise permitted for bank holding companies. At this time, PrivateBancorp has not elected to become a financial holding company.

Redemptions. Under the BHC Act, bank holding companies are required to provide the FRB with prior written notice of any purchase or redemption of their outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months is equal to 10% or more of their consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by or written agreement with the FRB. This prior notice requirement does not apply to any bank holding company that meets certain well-capitalized and well-managed standards and is not subject to any unresolved supervisory issues.

Tie-in Arrangements. Under the BHC Act and FRB regulations, we are prohibited from engaging in tie-in arrangements in connection with an extension of credit, lease, or sale of property or furnishing of services. Accordingly, we may not condition a client’s purchase of one of our products on the purchase of another product, unless both products are considered traditional banking products for regulatory purposes.

Interstate Banking and Branching Legislation. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking Act”), bank holding companies that are well-capitalized and managed are allowed to acquire banks across state lines subject to certain limitations. States may prohibit interstate acquisitions of banks that have not been in existence for at least five years. The FRB is prohibited from approving an application for acquisition if the applicant controls more than 10% of the total amount of deposits of insured depository institutions nationwide. In addition, interstate acquisitions may also be subject to statewide concentration limits.

Furthermore, under the Interstate Banking Act, banks are permitted, under some circumstances, to merge with one another across state lines and thereby create a main bank with branches in separate states. Approval of interstate bank mergers is subject to certain conditions, including: well-capitalized and well-managed standards, Community Reinvestment Act (“CRA”) compliance and deposit concentration limits, compliance with federal and state antitrust laws and compliance with applicable state consumer protection laws. After establishing branches in a state through an interstate merger transaction, a bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger could have established or acquired branches under applicable federal and state law. In addition, the Interstate Banking Act, as amended by the Dodd-Frank Act, permits a bank, with the approval of the appropriate federal and state bank regulatory agencies, to establish a de novo branch in a state other than the bank’s home state if the law of the state in which the branch is to be located would permit establishment of the branch if the out of state bank were a state bank chartered by such state.

Ownership Limitations. Under the federal Change in Bank Control Act, a person may be required to obtain the prior regulatory approval of the FRB before acquiring the power to directly or indirectly control the management, operations or policies of PrivateBancorp or before acquiring control of 10% or more of any class of our outstanding voting stock. Under the Illinois Banking Act, any acquisition of PrivateBancorp stock that results in a change in control may require prior approval of the IDFPR.

Dividends. In the FRB’s policy statement on the payment of cash dividends by bank holding companies, the FRB has expressed its view that a bank holding company should inform the FRB and should eliminate, defer or severely limit the payment of dividends if (i) the bank holding company’s net income for the past four quarters is not sufficient to fully fund the dividends; (ii) the bank holding company’s prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The policy statement also provides that the FRB should be informed in advance prior to declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the organization’s capital structure. Additionally, the FRB possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to prohibit or limit the payment of dividends. Additionally, as discussed above under “—Basel III Capital Rules,” the capital conservation buffer began being phased in on January 1, 2016, with full phase-in by January 1, 2019. If we do not maintain the required amount of CET1 to meet the capital conservation buffer amounts, our ability to pay dividends will be restricted.


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In addition to the restrictions on dividends imposed by the FRB, Delaware law also places limitations on the ability of a corporation to pay dividends. Corporations may only pay dividends out of surplus or net profits in accordance with Delaware law. The ability of a holding company to pay dividends may also depend on the receipt of dividends from its banking subsidiaries. During 2016 and 2015, the Bank did not make any dividend payments to the holding company and we used the cash maintained at the holding company level to pay dividends.

Bank Regulation

The Bank is subject to extensive supervision and regulation by various federal and state authorities. Additionally, as an affiliate of the Bank, PrivateBancorp is also subject, to some extent, to regulation by the Bank’s supervisory and regulatory authorities. As mentioned above, the Bank is an Illinois state-chartered bank and as such, is subject to supervision and examination by the IDFPR. As a FRB non-member bank, the Bank’s primary federal regulator is the FDIC and, as a depository institution with more than $10 billion in assets, the Bank is subject to the jurisdiction of the Consumer Financial Protection Bureau (the “CFPB”) relative to consumer protection laws.

Regulatory Approvals and Enforcement. Federal and state laws require banks to seek approval by the appropriate federal or state banking agency (or agencies) for any merger and/or consolidation by or with another depository institution, as well as for the establishment or relocation of any bank or branch office and, in some cases, to engage in new activities or form subsidiaries.

Federal and state statutes and regulations provide the appropriate bank regulatory agencies with great flexibility and powers to undertake enforcement actions against financial institutions, holding companies or persons regarded as “institution affiliated parties.” Possible enforcement actions range from the imposition of a capital plan and capital directive to a cease and desist order, civil money penalties, receivership, conservatorship or the termination of deposit insurance.

Transactions with Affiliates. Federal and state statutes place certain restrictions and limitations on transactions between banks and their affiliates, which include holding companies. Among other provisions, these laws place restrictions upon:

•
extensions of credit by an insured depository institution to the bank holding company or any non-banking affiliates;
•
the purchase by an insured depository institution of assets from affiliates;
•
the issuance by an insured depository institution of guarantees, acceptances or letters of credit on behalf of affiliates; and
•
investments by an insured depository institution in stock or other securities issued by affiliates or acceptance thereof as collateral for an extension of credit.

Permissible Activities, Investments and Other Restrictions. Federal and state laws provide extensive limitations on the types of activities in which our subsidiary bank may engage and the types of investments it may make. For example, banks are subject to restrictions with respect to engaging in securities activities, real estate development activities and insurance activities and may invest only in certain types and amounts of securities and may invest only up to certain dollar amount thresholds in their premises.

Monetary Policy. The Bank is affected by the credit policies of the FRB, which regulate the national supply of bank credit. Such regulation influences overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans and paid on deposits. The FRB’s monetary policies have had a significant effect on the operating results of commercial banks in the past and this trend is likely to continue in the future.

Dividends. Federal and state laws restrict and limit the dividends the Bank may pay. Under the Illinois Banking Act, the Bank may not pay dividends of an amount greater than its net profits after deducting losses and bad debts. For the purpose of determining the amount of dividends that an Illinois bank may pay, bad debts are defined as debts upon which interest is past due and unpaid for a period of six months or more unless such debts are well secured and in the process of collection.

In addition to the foregoing, the ability of the Bank to pay dividends may be affected by the various minimum capital requirements (previously described) and the capital and non-capital standards established under the Federal Deposit Insurance Corporation Improvements Act of 1991 (“FDICIA”), as described below.

Reserve Requirements. The Bank is subject to FRB regulations requiring depository institutions to maintain noninterest-earning reserves against its transaction accounts. For net transaction accounts in 2017, the first $15.5 million of a bank’s transaction accounts (subject to adjustments by the FRB) are exempt from the reserve requirements. The FRB regulations generally require 3% reserves on a bank’s transaction accounts totaling between $15.5 million and $115.1 million. For transaction accounts totaling over $115.1 million, FRB regulations require reserves of $3.0 million plus 10% of the amount over $115.1 million.

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Cross-Guaranty. Under the FDI Act, an insured institution that is commonly controlled with another insured institution shall generally be liable for losses incurred, or reasonably anticipated to be incurred, by the FDIC in connection with the default of such commonly controlled insured institution, or for any assistance provided by the FDIC to such commonly controlled institution, which is in danger of default.

Standards for Safety and Soundness. The FDI Act, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994, requires the FDIC, together with the other federal bank regulatory agencies, to prescribe standards of safety and soundness, by regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock valuation and compensation. The federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to FDICIA. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the federal bank regulatory agencies adopted regulations that authorize, but do not require, the agencies to order an institution that has been given notice that it is not satisfying the safety and soundness guidelines to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of FDICIA. If an institution fails to comply with such an order, the agency may seek to enforce its order in judicial proceedings and to impose civil money penalties. The federal bank regulatory agencies have also adopted guidelines for asset quality and earning standards. State-chartered banks may also be subject to state statutes, regulations and guidelines relating to safety and soundness, in addition the federal requirements.

Capital Requirements and Prompt Corrective Action. FDICIA currently defines five capital levels: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.”

FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that fall below minimum capital standards and prohibits any depository institution from making any capital distribution that would cause it to be undercapitalized. Institutions that are not adequately capitalized may be subject to a variety of supervisory actions, including restrictions on growth, investment activities, capital distributions and affiliate transactions, and will be required to submit a capital restoration plan which, to be accepted by the regulators, must be guaranteed in part by any company having control of the institution (for example, the Company or a stockholder controlling the Company). In other respects, FDICIA provides for enhanced supervisory authority, including greater authority for the appointment of a conservator or receiver for critically undercapitalized institutions. The capital-based prompt corrective action provisions of FDICIA and its implementing regulations apply to FDIC-insured depository institutions. However, federal banking agencies have indicated that, in regulating bank holding companies, the agencies may take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon subsidiary insured depository institutions pursuant to the prompt corrective action provisions of FDICIA. State-chartered banks may also be subject to similar supervisory actions by their respective state banking agencies.

Depository institutions that are less than well-capitalized are also subject to restrictions under the FDI Act relating to accepting and renewing brokered deposits, as well as deposit rate restrictions.

The capital rules discussed previously set forth the current prompt corrective action requirements to be deemed well-capitalized and adequately capitalized. See the “Capital Requirements” section above.

Stress Testing. Financial institutions with total consolidated assets between $10 billion and $50 billion are subject to rules adopted by the federal bank regulatory agencies implementing the stress test requirements under the Dodd-Frank Act. Specifically, under the stress rest rules required by the Dodd-Frank Act, we are required to assess the potential impact of a minimum of three macroeconomic scenarios—baseline, adverse and severely adverse scenarios—on our consolidated balance sheet (including risk-weighted assets), income statement and capital. This assessment is referred to as “DFAST.” We are required to conduct the DFAST on an annual basis, submit the results to the FRB and the FDIC and publicly disclose a summary of such results under the supervisory severely adverse scenario. We completed the required DFAST and submitted the results to the FRB and the FDIC in July 2016, and in October 2016 publicly disclosed a summary of the results under the supervisory severely adverse scenario.

Insurance of Deposit Accounts. Under FDICIA, the Bank, as a FDIC-insured institution, is required to pay deposit insurance premiums based on the risk it poses to the Deposit Insurance Fund (“DIF”). The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve required ratios in the insurance fund and to impose special additional assessments.

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The FDIC rules on deposit insurance assessment implement a provision in the Dodd-Frank Act that broadened the assessment base from one based on domestic deposits to one based on total assets less average tangible equity. Such rules also establish a separate risk-based assessment system for “large institutions” with more than $10 billion in assets, such as PrivateBank, and for other large, highly complex institutions. Under these rules, large institutions are subject to different minimum and maximum total assessment rate ranges. The ranges are subject to certain adjustments by the FDIC without further rulemaking. The large bank pricing system is intended to result in higher assessments for banks with concentrations of “higher-risk assets,” less stable balance sheet liquidity, or potentially higher loss severity in the event of failure. The FDIC defines higher-risk assets for deposit insurance assessment purposes as “higher-risk commercial and industrial loans,” construction and development loans and “higher-risk consumer loans.” Higher-risk commercial and industrial loans are defined as loans to borrowers who have an operating leverage ratio exceeding a specified amount and are using the proceeds for specified purposes; a portion (but not all) of our leveraged loans are considered to be higher-risk assets under for this purpose. Refer to Table 13 in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for our levels of higher-risk assets as of December 31, 2016 and 2015. Brokered deposits generally contribute to an increase in FDIC insurance assessments due to their impact on the loss severity factor and the core deposit and balance sheet liquidity ratios used to calculate the assessments.

The FDIC provides deposit insurance on qualifying accounts in an amount up to $250,000. Deposit insurance may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Such terminations can only occur, if contested, following judicial review through the federal courts. We do not know of any practice, condition or violation that might lead to termination of deposit insurance for the Bank.

The Dodd-Frank Act raised the minimum reserve ratio of the DIF from 1.15% to 1.35% of estimated insured deposits, which ratio is required to be attained by September 30, 2020, eliminated the size limit of the DIF, and directed the FDIC to issue a rule establishing a new designated reserve ratio. Pursuant to this directive, the FDIC issued a rule setting a designated reserve ratio at 2.0% of insured deposits. These policies may result in increased assessments on certain institutions, including the Bank, with more than $10 billion in assets.

Anti-Money Laundering & OFAC Sanctions Programs. The Bank Secrecy Act (“BSA”), as amended by the USA PATRIOT Act of 2001, imposes significant obligations on financial institutions to detect and deter money laundering and terrorist financing. Financial institutions are required to establish programs designed to implement BSA requirements that include: verifying customer identification, reporting certain large cash transactions, responding to requests for information by law enforcement agencies, and monitoring, investigating and reporting suspicious transactions or activity. The U.S. Treasury’s Office of Foreign Assets Control (“OFAC”) enforces economic and trade sanctions based on U.S. foreign policy and national security goals against entities such as targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in the proliferation of weapons of mass destruction. We are subject to these rules and have implemented policies, procedures and controls to comply with the anti-money laundering regulations and the OFAC sanctions programs.

Compliance with Consumer Protection and Fair-Lending Laws. The Bank is subject to many state and federal statutes and regulations designed to protect consumers, such as privacy laws, the Truth in Lending Act (Regulation Z), the Truth in Savings Act (Regulation DD), the fair lending laws including the Equal Credit Opportunity Act (Regulation B) and the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act (Regulation C) and the Fair and Accurate Credit Transactions Act. Among other things, these statutes and regulations:

•
require lenders to disclose credit terms in meaningful and consistent ways;
•
prohibit discrimination against an applicant in any consumer or business credit transaction;
•
prohibit discrimination in housing-related lending activities;
•
require certain lenders to collect and report applicant and borrower data regarding loans for home purchases or improvement projects;
•
require lenders to provide borrowers with information regarding the nature and cost of real estate settlements;
•
prohibit certain lending practices and limit escrow account amounts with respect to real estate transactions;
•
require financial institutions to implement identity theft prevention programs and measures to protect the confidentiality of consumer financial information; and
•
prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.

The CFPB has primary responsibility for implementing, examining, and enforcing compliance with federal financial consumer protection laws with respect to banking organizations with total consolidated assets of $10 billion or more, such as the Bank. The

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CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive” acts and practices and to enforce consumer lending and nondiscrimination laws. Pursuant to its responsibility, the CFPB frequently brings enforcement actions against banks and their affiliates and continues to conduct various studies that may lead to future regulation.

In addition, the CFPB is responsible for overseeing compliance with the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”). In particular, these regulatory provisions:

•
prohibit certain compensation for mortgage brokers based on certain loan terms (e.g., compensation based on yield spread premiums);
•
more highly regulate mortgage servicing activities including error resolution, force placing insurance, and loss mitigation and collection activity;
•
require financial institutions to make a reasonable and good faith determination that borrowers have the ability to repay loans for which they apply. If a financial institution fails to make such a determination, a borrower can assert this failure as a defense to foreclosure and will have the potential to recover their finance charges, fees, damages and attorney’s fees. The rules create a “safe harbor” (a conclusive presumption for loans that meet certain criteria and are not high-priced loans that the financial institution made a good faith and reasonable determination of the borrower’s ability to repay); and
•
impose appraisal requirements for high cost loans and loans secured by first lien residential mortgages.

The CFPB has implemented rules that simplify and integrate the mortgage disclosures required under TILA and RESPA. The Bank believes that it is in compliance with these disclosure requirements.

With respect to electronic transfers of foreign currency originated by consumers, the Bank is required to make certain disclosures of, among other things, U.S. and foreign taxes and fees, foreign exchange rate, total amounts paid and to be received, and error resolution and cancellation rights.

In part due to the formation of the CFPB pursuant to the Dodd-Frank Act, there has been increased attention to enforcement of consumer protection laws by federal regulatory authorities, particularly with respect to “unfair, deceptive or abusive” acts and practices as well as increased scrutiny of banks’ programs for compliance with consumer lending laws and regulations, including fair lending laws. Among other things, fair lending laws prohibit practices that result in disparate treatment or disparate impact on minority groups in connection with residential mortgages and other 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 damage our reputation.

Community Reinvestment. Under the CRA, a financial institution has a continuing and affirmative obligation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, or limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. However, institutions are rated on their performance in meeting the needs of their communities. Performance is tested in three areas: (a) lending, to evaluate the institution’s community lending performance, particularly to low- and moderate income individuals and neighborhoods and small businesses in its assessment areas, taking into account fair lending practices; (b) investment, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low- or moderate-income individuals and small businesses; and (c) service, to evaluate the institution’s delivery of products and services through its branches and automated teller machines, as well as its service to the community. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions.

The CRA requires that all institutions make public disclosure of their CRA ratings. In the first quarter 2016, the Bank was assigned a “satisfactory” rating for its most recent CRA performance evaluation, which covers our performance during 2013, 2014 and a portion of 2015.

Real Estate Lending Concentrations. The FDIC, FRB and the Office of the Comptroller of the Currency (the “OCC”) have jointly issued supervisory guidance on concentrations in commercial real estate lending. The guidance reinforces and enhances existing regulations and guidelines for safe and sound real estate lending. The guidance provides supervisory criteria, including numerical

17

indicators to assist in identifying institutions with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny. The guidance focuses on institutions properly identifying whether they have a commercial real estate concentration and, if so, instituting the appropriate risk management procedures and increasing capital so that it is commensurate with the risk of having such a concentration.

Leveraged Lending Guidance. In March 2013, the FDIC, the FRB and the OCC jointly issued supervisory guidance on leveraged lending to update and revise their previous interagency guidance issued in April 2001, which addressed expectations for the content of credit policies, the need for well-defined underwriting standards, the importance of defining an institution’s risk appetite for leveraged loan transactions, and the importance of stress-testing exposures and portfolios. The impetus for the updated guidance was the significant growth in the volume of leveraged credit and in the participation of unregulated (i.e., non-bank) investors in the leveraged loan market since the original guidance was issued, as well as changes in the loan structures and underwriting standards in the industry over such time. The updated and revised regulatory guidance describes expectations for the sound risk management of leveraged lending activities, including the importance for institutions to maintain, among other things, a credit limit and concentration framework consistent with the institution’s risk appetite, strong pipeline management policies, and procedures and guidelines for conducting periodic portfolio and pipeline stress tests. As a predominantly commercial bank, we participate in the leveraged lending market, both as an originator, underwriter and (in some cases) syndicator of such loans and as a non-lead participant in syndicated leveraged loans. Although the revised interagency guidance does not impose specific limitations on leveraged lending, in accordance with the expectations set forth in the guidance, we have enhanced our risk management practices with respect to such lending, with ongoing monitoring of the level of leveraged loans in relation to our capital.

Allowance for Loan and Lease Losses. In December 2006, the federal bank regulatory agencies issued an Interagency Policy Statement revising their previous policy on the Allowance for Loan and Lease Losses (“ALLL”), which was issued in 1993. The policy statement was updated to ensure consistency with U.S. generally accepted accounting principles (“U.S. GAAP”) and post-1993 supervisory guidance. According to the revised policy statement, the ALLL represents one of the most significant estimates in an institution’s financial statements and regulatory reports. Because of its significance, each institution has responsibility for developing, maintaining and documenting a comprehensive, systematic, and consistently applied process appropriate to its size and the nature, scope, and risk of its lending activities for determining the amounts of the ALLL and the provision for loan and lease losses.

The policy statement provides that to fulfill this responsibility, each institution should ensure controls are in place to consistently determine the ALLL in accordance with U.S. GAAP, the institution’s stated policies and procedures, management’s best judgment and relevant supervisory guidance. Consistent with long-standing supervisory guidance, the policy states that institutions must maintain an ALLL at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the remainder of the loan portfolio as of the evaluation date. Estimates of credit losses should reflect consideration of all significant factors that affect the collectability of loans in the portfolio as of the evaluation date. Arriving at an appropriate allowance involves a high degree of management judgment because of the inputs and assumptions that are used in our ALLL model, the lagging characteristics of a historical loss model and the qualitative adjustments that are applied to the quantitative output from such model.
 

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EXECUTIVE OFFICERS OF THE REGISTRANT

The name, age, position and office, and business experience during at least the past five years, of our current executive officers are set forth below.

Name (Age)
Position or Employment for Past Five Years
Executive
Officer Since
Larry D. Richman (64)
President and Chief Executive Officer, and member of the Board of Directors, of PrivateBancorp and The PrivateBank since November 2007. Prior to joining the Company, Mr. Richman was President and Chief Executive Officer of LaSalle Bank, N.A. and President of LaSalle Bank Midwest N.A., which were sold to Bank of America Corporation on October 1, 2007. Mr. Richman began his career with American National Bank and joined Exchange National Bank in 1981, which merged with LaSalle Bank in 1990.
2007
C. Brant Ahrens (46)
Executive Vice President of the Company and President of Personal Client Services of the Bank since February 2012 overseeing Private Wealth and Community Banking. Prior to that, he was Chief Operating Officer from 2008 until October 2009, with leadership responsibility for community banking, operations, information technology, strategic development, human resources, marketing and communications. Mr. Ahrens joined PrivateBancorp as Chief Strategy Officer in 2007. Mr. Ahrens was previously Group Senior Vice President and head of the Financial Institutions Group at LaSalle Bank, N.A., where he spent 15 years in various capacities including risk management, strategic development and as head of International Corporate Banking.
2007
Karen B. Case (58)
Executive Vice President of the Company and President of Commercial Real Estate of the Bank. Prior to joining the Company in October 2007, Ms. Case was Executive Vice President of LaSalle Bank, N.A. overseeing the Illinois Commercial Real Estate group. Prior to joining LaSalle Bank in 1992, Ms. Case established and managed the Midwest real estate lending operations for New York-based Marine Midland Bank.
2007
Jennifer R. Evans (58)
Executive Vice President, General Counsel and Corporate Secretary of the Company. In addition to her strategic advisory role and responsibility for all legal functions, Ms. Evans assumed oversight responsibility for compliance and regulatory affairs functions in mid-2016. Prior to joining the Company in January 2010, Ms. Evans was a consultant to various financial institutions, audit committees and public companies regarding compliance, regulatory and disclosure matters. Ms. Evans served as Executive Vice President and General Counsel for MAF Bancorp, Inc. and its subsidiary Mid America Bank from 2004 to 2007 following 20 years in private practice with the law firm Vedder Price P.C.
2010
Bruce R. Hague (62)
Executive Vice President of the Company and President of National Commercial Banking of the Bank, with responsibility for our regional banking and commercial lending offices. Prior to joining the Bank in October 2007, Mr. Hague spent 15 years at LaSalle Bank, N.A., where he ultimately became Executive Vice President of National Commercial Banking, responsible for 23 regional banking offices, including all commercial regional offices located throughout the United States, International Corporate Banking, the LaSalle Leasing Group, Corporate Finance, and Treasury Management Sales.
2007
Kevin M. Killips (62)
Executive Vice President of the Company and Chief Financial Officer of the Company and the Bank since March 2009. In addition to his responsibility for all financial functions, Mr. Killips has leadership responsibility for operational and technology functions. Prior to joining the Company, Mr. Killips served as controller and chief accounting officer of Discover Financial Services (NYSE: DFS) from March 31, 2008. Prior to joining Discover Financial Services, Mr. Killips was employed by LaSalle Bank, N.A., where he worked for nearly ten years and ultimately served as Corporate Executive Vice President, North American Chief Accounting Officer and Corporate Controller. Prior to working at LaSalle Bank, he was director of Internal Audit, and then Vice President-Finance for leasing operations at Transamerica Corporation. Mr. Killips, a certified public accountant, also worked for Ernst & Young from 1979-1993.
2009


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Name (Age)
Position or Employment for Past Five Years
Executive
Officer Since
Bruce S. Lubin (63)
Executive Vice President of the Company and President of Illinois Commercial Banking of the Bank. From December 2009 to February 2012, he also had leadership responsibility for the Private Wealth group. Prior to joining the Bank in October 2007, Mr. Lubin was executive vice president and head of the Illinois Commercial Banking Group at LaSalle Bank, N.A. Mr. Lubin had been employed by LaSalle Bank since 1990, when it acquired Exchange National Bank. Mr. Lubin was an employee of Exchange National Bank beginning in 1984.
2007
Kevin J. Van Solkema (56)
Executive Vice President and Chief Risk Officer of the Company, a position he has held since July 2016. Prior to becoming the Chief Risk Officer, he served as the Chief Credit Risk Officer since joining the Company. Prior to joining the Company in January 2008, Mr. Van Solkema was employed by LaSalle Bank, N.A. as Deputy Chief Credit Officer. From March through June 2007, Mr. Van Solkema was employed by CitiMortgage before rejoining LaSalle Bank. Prior to that, Mr. Van Solkema served as Head of Consumer Risk Management for ABN AMRO North America/LaSalle Bank, which included responsibility for all credit and operational risk management activities for ABN AMRO Mortgage Group, as well as LaSalle Bank’s consumer lending and portfolio mortgage units. Mr. Van Solkema was Head of Risk Management at Michigan National Bank prior to it being acquired by LaSalle Bank in 2001.
2008
Vicki Znavor (56)
Executive Vice President and Chief Human Resources Officer of the Company. Prior to joining the Company in 2013, Ms. Znavor was Vice President, Performance Management Program Manager for The Northern Trust Company from November 2009. Previous to that, she held the role of Vice President Continuous Improvement for Sara Lee Corporation, where she worked for over 27 years and served in various roles which included responsibilities over executive compensation, recruitment and talent management, employee relations, payroll, benefit plans, employee communications, human resources information systems, strategic planning and transformation management.
2013

AVAILABLE INFORMATION

We file annual, quarterly, and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). These filings are available to the public over the Internet, free of charge through the investor relations section of our website at http://investor.theprivatebank.com and through the SEC’s website at www.sec.gov. You may also read and copy any document we file with the SEC at its public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Copies of these documents also can be obtained at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington D.C. 20549 or by calling 1-800-SEC-0330 for additional information on the operation of the public reference facility.

The following documents can be accessed through our web site or are available in print upon the request of any stockholder to our Corporate Secretary:

•
certificate of incorporation,
•
by-laws,
•
charters of the audit, compensation, and corporate governance committees of our board of directors
•
corporate code of ethics,
•
corporate governance guidelines, and
•
excessive or luxury expenditures policy.

Within the time period required by the SEC and The NASDAQ Stock Market, we will post on our web site any substantive amendment to our code of ethics and any waiver to the code of ethics applicable to any of our executive officers or directors. In addition, our website includes information concerning purchases and sales of our securities by our executive officers and directors. References to our website addressed in this report are provided as a convenience and do not constitute, and should not be deemed as, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this report.

Our Corporate Secretary can be contacted by writing to PrivateBancorp, Inc., 120 South LaSalle Street, Chicago, Illinois 60603, Attn: Corporate Secretary. Our investor relations department can be contacted by telephone at (312) 564-2000.

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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 the federal securities laws. Forward-looking statements represent management’s current beliefs and expectations regarding future events, such as our anticipated future financial results, credit quality, liquidity, 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.

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

•
the possibility that the transaction with CIBC does not close when expected or at all because required regulatory, stockholder or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all; or the possibility that, as a result of the announcement and pendency of the proposed transaction, we experience difficulties in employee retention and/or clients or vendors seek to change their existing business relationships with us, or competitors change their strategies to compete against us, any of which may have a negative impact on our business or operations;
•
unanticipated changes in monetary policies of the Federal Reserve or significant adjustments in the pace of, or market expectations for, future interest rate changes;
•
uncertainty regarding U.S. regulatory reform proposals, geopolitical developments and the U.S. and global economic outlook that may continue to 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;
•
competitive pressures in the financial services industry relating to both pricing and loan structures, which may impact our growth rate;
•
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;
•
availability of sufficient and cost-effective sources of liquidity or funding as and when needed;
•
unanticipated losses of one or more large depositor relationships, or other significant deposit outflows;
•
loss of key personnel or an inability to recruit appropriate talent cost-effectively;
•
greater-than-anticipated costs to support the growth of our business, including investments in technology, process improvements or other infrastructure enhancements, or greater-than-anticipated compliance or regulatory costs and burdens; or
•
failures or disruptions to, or compromises of, our data processing or other information or operational systems, including the potential impact of disruptions or security breaches at our third-party service providers.

Forward-looking statements are subject to risks, assumptions and uncertainties and could be significantly affected by many factors, including those set forth in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this Form 10-K as well as those set forth in our subsequent periodic and current reports filed with the SEC. These factors should be considered in evaluating forward-looking statements and undue reliance should not be placed on our forward-looking statements. 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.
ITEM 1A. RISK FACTORS

Our business, financial condition and results of operations are subject to various risks, including those discussed below, which may affect the value of our securities. The risks discussed below are those that we believe are the most significant risks to our business plans and strategies and financial performance, although additional risks not presently known to us or that we currently deem less significant may also adversely affect our business, financial condition and results of operations, perhaps materially. Before making a decision to invest in our securities, you should carefully consider the risks and uncertainties described below and elsewhere in this report.


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A significant portion of our loan portfolio is comprised of commercial loans, many of which are larger credit relationships, including some that are leveraged loans. The repayment of such loans is largely dependent upon the financial success and viability of the borrower and the state of the economy.

Our commercial loan portfolio, which includes commercial and industrial loans and owner-occupied commercial real estate loans, totaled $9.6 billion, or 64% of our total loan portfolio, at December 31, 2016. The repayment of the commercial loans is largely dependent upon the financial success and viability of the borrower, which generally is impacted by the state of the overall economy, rather than through the operation or liquidation of the underlying collateral. The collateral securing commercial loans, such as accounts receivable, inventory, equipment and real estate specific to the borrower’s use, may be difficult and costly to liquidate given its often unique nature. As a result, if a commercial loan defaults and we foreclose on the underlying collateral, we may not be able to recover the full principal amount of the loan, which would increase our credit costs.

A portion of our commercial and industrial loans are leveraged loans, which are primarily underwritten on the basis of the recurring earnings of the borrower, and have a higher ratio of debt-to-earnings and lower collateral coverage as compared to commercial and industrial loans not characterized as leveraged. As a result, in the event of a default, the loss potential generally is greater for leveraged loans as compared to more traditional commercial and industrial loans with more collateral coverage.

Over the past few years, the federal bank regulatory agencies have jointly issued updated supervisory guidance, and increased their examination focus, on leveraged lending by regulated institutions due to the significant growth in the volume of leveraged credit issued, developments in how some leveraged loans are structured and their desire to ensure risk management practices in the leveraged loan market keep pace with market developments. A majority of our leveraged loan portfolio are loans that are classified as “higher-risk assets” by the FDIC under its risk-based deposit insurance assessment framework.  Refer to Table 13 in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As we manage our overall risk appetite to adapt to market and economic conditions affecting the leveraged loan market, including reduced demand by the banking industry to participate in syndicated leveraged loan transactions, our future loan growth could be impacted.

Many of our commercial loans involve larger relationships. We had 182 individual credit relationships with credit commitments exceeding $25 million, most of which are commercial loans, which totaled $6.2 billion of commitments and represented $3.6 billion of outstanding loans, or 24% of our loan portfolio, at December 31, 2016. The borrowers in some of these credit relationships may be related to other obligors as guarantors or share related ownership structures. Of our largest commitments, commitments exceeding $50 million represented $916.4 million in total commitments and $336.4 million of outstanding loans at December 31, 2016, compared to $688.3 million in total commitments and $232.1 million of outstanding loans at December 31, 2015. Because of their size relative to our overall loan portfolio, the unexpected occurrence of an adverse event or development affecting one or more of these large client relationships could materially affect our results of operation and financial condition, including by causing quarterly fluctuations in our credit costs and credit quality metrics.

Consistent with our middle market commercial lending focus, we have several industry and product type concentrations within our loan portfolio. These particular industries and product types are subject to specific risks that could adversely affect our business.

Several industry and product type concentrations within our loan portfolio are subject to specific risks that could adversely affect our financial condition and results of operations to the extent they have correlated risk. Some of these portfolio concentrations and their particular risks include the following:

•
Healthcare - This is the largest industry classification within our commercial loan portfolio, as 21% of our commercial loan portfolio, or $2.0 billion, at December 31, 2016, consisted of healthcare-related loans. Such loans are comprised primarily of loans secured by skilled nursing and assisted living facilities that are dependent, in part, on the receipt of payments and reimbursements under government contracts for services provided. Accordingly, our clients and their ability to service debt may be adversely impacted by the financial health of state or federal payors and the ability of governmental entities, many of which have experienced budgetary stress in the recent economic environment, to make payments for services previously provided. Additionally, across the healthcare industry, structural changes to the government reimbursement model may negatively impact performance for managed care facilities as borrowers adapt to these changes, which could impact their ability to service debt. As of December 31, 2016, 53% of the healthcare portfolio was secured by facilities in five states, with Illinois representing the highest percentage of facilities at 23%.
•
Manufacturing - This is the second largest industry classification within our commercial loan portfolio, with 19% of our commercial loan portfolio, or $1.8 billion, at December 31, 2016 consisting of loans to borrowers whose primary business activity was manufacturing. During the second half of 2015 and into 2016, the U.S. manufacturing sector experienced a significant slowdown, as evidenced by declines or slowing rates of growth in a number of key indicators, due in part to

22

the economic headwinds of lower commodity prices (including oil and gas prices) and a strong U.S. dollar, with particular stress faced by durable goods manufacturing. Although the U.S. manufacturing sector began to rebound toward the end of 2016, the sector’s performance may continue to experience volatility due to the impact of commodity prices, currency exchange rates, possible U.S. corporate tax reform, U.S. political developments and broader geopolitical developments on this sector. Any stress or volatility experienced by the U.S. manufacturing sector specifically could adversely impact our existing loan portfolio and/or our future loan growth rate.
•
Commercial Real Estate - In addition to our large commercial loan portfolio, we have a significant commercial real estate portfolio, with $4.1 billion of commercial real estate loans (excluding construction loans) as of December 31, 2016, representing 27% of our total loan portfolio. The commercial real estate industry has exhibited strong performance over the past several years, but significant new development volume in recent years, particularly in certain asset classes such as multifamily, could place pressure on rents and vacancy rates, which could adversely impact borrowers’ ability to service debt. Additionally, although commercial real estate values, and the net operating income generated by them, are influenced by the overall health of the U.S. economy, they also can be significantly impacted by other factors such as market interest rates, excess capacity or lack of supply of comparable properties in the particular market and global geopolitical events given the importance of foreign investor participation in U.S. real estate markets. If the value of commercial real estate were to decline materially due to the foregoing or other factors, a significant portion of our commercial real estate loan portfolio could become under-collateralized. If our commercial real estate loans were to become troubled during a time of depressed commercial real estate values, we may not be able to realize the value of the collateral that we anticipated at the time of originating the loan, which could increase our credit costs and have a material adverse effect on our financial condition and results of operations.

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

Our primary sources of funding are deposits and, to a lesser extent, Federal Home Loan Bank (“FHLB”) borrowings. We rely on these funding sources to provide sufficient liquidity to support our loan growth on a cost-effective basis while accommodating the transaction and cash management needs of our clients. Our deposit base is primarily comprised of commercial clients and institutional depositors and relatively concentrated in large relationships, with our ten largest deposit relationships comprising 15% of total deposits at December 31, 2016. At year end 2016, we had 31 client relationships with greater than $75 million in deposit balances, which totaled $4.4 billion, or 27%, of total deposits. The unanticipated loss of one or more large deposit relationships, or significant movements in large deposit accounts, could stress our liquidity and possibly require us to utilize higher cost contingency funding sources. A majority of our large deposit relationships of $75 million or more come from financial services clients, such as securities broker-dealers for which we serve as a cash sweep program bank, hedge funds and fund administrators and futures commission merchants.  Financial services clients have a higher propensity to generate large transactional flows, which contributes to liquidity risk, and some of these deposits, particularly from hedge funds, fund administrators and futures commission merchants, may exhibit elevated volatility and be more sensitive to financial stress as compared to other commercial deposits due to the more complex liquidity and cash flow needs of financial services clients given the nature of their businesses. Additionally, large commercial deposits may be more sensitive to interest rate increases as compared to smaller retail deposits, which could cause our deposit costs to increase more quickly in a rising rate environment than if we had a larger retail deposit base. Since the U.S. presidential election in November 2016, market expectations about future interest rate increases have changed significantly and the Federal Reserve increased the federal funds target rate by 25 basis points in December 2016. If market interest rates continue to increase, we could experience more competition for deposits, as money market funds and other liquid fixed income alternatives could become more attractive to commercial depositors relative to bank deposits. In such case, our net interest margin could be negatively impacted if we must pay more to continue attracting sufficient commercial deposits to fund our growth and/or increase our reliance on wholesale funding sources, such as FHLB borrowings. Furthermore, if we were to experience increased challenges in attracting and maintaining stable, cost-effective sources of liquidity, we may need to moderate our loan growth to adhere to prudent risk management objectives.
As of December 31, 2016, we had outstanding borrowings from the FHLB of $1.6 billion. Because we rely on FHLB borrowings to supplement our deposits, if we were unable to borrow additional amounts from the FHLB because of insufficient eligible collateral or other conditions, we would need to supplement our deposits with an alternate source of funds, which could increase our cost of funding and may not match our funding needs as well as FHLB borrowings.
The importance of stable sources of funding is heightened for a predominantly commercial banking business because of unfunded commitments extended to commercial clients. Our total unfunded commitments to extend credit, including obligations to issue letters of credit, were $6.8 billion as of December 31, 2016. Given the large size of many of our credit relationships, significant draws on outstanding commitments by a few clients may adversely impact our liquidity and require us to utilize higher cost contingency funding.

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A prolonged period of economic uncertainty or a downturn in economic conditions, in the U.S. or globally, could have a material adverse effect on our financial condition and results of operations.

Banking, and the financial industry in general, is reliant on the strength of the broader economy. Although the U.S. economy has experienced gradual improvement since the depths of the last recession in 2009, including significant improvement in the unemployment rate, there continue to be economic headwinds from muted GDP growth, limited wage growth, low inflation, and a strong U.S. dollar. Market conditions are also impacted by continued uncertainty related to U.S. and European fiscal issues, a slowdown in economic growth in China, the U.S. political climate at the national and local levels and the new U.S. Presidential administration, future U.S. corporate tax policy, global economic conditions and geopolitical tensions. In addition, the financial condition of the State of Illinois and the City of Chicago (higher corporate tax rates, significant budget deficits, large unfunded pension obligations and a deteriorating credit rating), where we do the majority of our business, may contribute to an adverse climate for doing business in the state and city, which could negatively impact us to the extent it leads to declines in business activity in Illinois and the greater Chicago metropolitan area. Although we do not hold direct obligations of the State of Illinois, such conditions can also negatively affect the market value of those municipal bonds that are obligations of municipalities domiciled in Illinois. The foregoing uncertainties could result in, among other things, a deterioration of credit quality, impairment of real estate and other collateral values or reduced demand for credit or other products and services we offer to clients, which could materially adversely affect our financial condition and results of operations.

Our allowance for loan losses may be insufficient to absorb losses in our loan portfolio.

Every loan we make carries a certain risk of non-payment. This risk is affected by, among other things:

•
the credit risks posed by the particular borrower and loan type;
•
the duration and structure of the loan;
•
in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;
•
the ability to identify potential repayment issues in loans at an early stage; and
•
changes in economic and industry conditions.

We maintain an allowance for loan losses at a level management believes is sufficient to absorb credit losses inherent in our 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. We determine the allowance using our historical default and loss information, current risk ratings for our loans and certain qualitative factors that are assessed by management. The application of qualitative factors, in particular, requires a significant amount of management judgment. We may incur aggregate losses on our loan portfolio that exceed, perhaps by a significant amount, the $185.8 million that we have reserved in the allowance at December 31, 2016, particularly if economic conditions were to materially worsen.

Because the predominantly commercial nature of our loan portfolio results in us having a greater number of larger credit relationships than many other banks of a generally comparable size, as evidenced by the fact that 24% of our loan portfolio at December 31, 2016 was comprised of credit relationships in amounts exceeding $25 million, adverse developments with respect to even a small number of credit relationships could lead to a significant increase in our allowance for loan losses and related provision expense in a given period. The occurrence of an adverse rating migration for one or more large loans, particularly a leveraged loan, could require a meaningful increase in our allowance for loan losses and related provision expense under our allowance methodology. In light of the foregoing, we may experience significant variability in our quarterly provision expense and charge-offs and overall credit quality trends.

We may be adversely affected by the failure of interest rates to meaningfully increase from their prolonged historically low levels.

Our operating results are largely dependent on our net interest income, which is the difference between the interest income earned on earning assets, primarily loans and investment securities, and the interest expense paid on deposits and borrowings. The spread between the yield on our interest-earning assets and our overall cost of funds has been compressed in the prolonged low interest rate environment, with our ability to increase contractual loan yields limited by continued strong competition in the lending market. Because we price loans primarily on a variable-rate basis (generally to LIBOR), we believe our balance sheet is well-positioned to benefit from a rising interest rate environment.  However, it is more difficult to predict the impact of a rising interest rate environment on our cost of funds, as funding costs are significantly dependent on a number of factors outside of our control, such as client deposit behavior and deposit pricing pressure from competitors. Interest rates are affected by numerous factors, including monetary policy of the Federal Reserve and expectations regarding the same, and future interest rate levels are inherently difficult

24

to predict. Although the Federal Reserve increased by the target federal funds rate by 25 basis points in December 2015 and again in December 2016, market interest rates still remain near historically low levels. There can be no assurances as to when or if the Federal Reserve will continue to raise interest rates or the extent to which our net interest income will benefit if such increases occur.

Over the past several years, the Federal Reserve implemented various significant economic strategies that impacted interest rates, inflation, and the shape of the yield curve and future actions or strategies could further impact such conditions, which could adversely affect our operating results.

Over the past several years, the Federal Reserve implemented a series of domestic monetary policy initiatives in response to economic conditions, including the purchase of U.S. treasury securities and mortgage-backed securities (commonly known as “quantitative easing” (“QE”)). Among other things, QE strategies were intended to create or maintain a low interest rate environment and stimulate economic activity, and have theoretically caused interest rates to remain lower than they would have been without such involvement. The Federal Reserve formally ended the QE program during the fourth quarter of 2014, but market interest rates nevertheless remain highly dependent on actions of the Federal Reserve and market participants’ expectations about such actions. As discussed above, our net interest income is significantly dependent on the level of market interest rates given their impact on loan yields and deposit costs. More generally, market interest rates also influence many other elements of our business, such as asset management fees (as interest rates impact equity and fixed income values, which drive such fees), mortgage banking revenue (as interest rates impact the demand for mortgages and gains on sales to the secondary market), capital markets revenue (as interest rates, and expectations about future direction, impact client demand for interest rate derivatives and foreign currency volatility), syndication fees (as interest rates impact pricing and demand for syndicated loans), loan growth (as interest rates can impact the overall economy and, as a result, demand for new credit) and gains, losses and yields on our investment securities portfolio. Accordingly, actions by the Federal Reserve and market expectations about potential actions could adversely affect our operating results, including by creating volatility in such results.

Our business could be significantly impacted if we, or our third party service providers, suffer failure, cyber-attack or disruptions of information systems, our employees cause an operational failure or our clients suffer losses due to fraudulent or negligent acts by their employees or third parties in connection with their banking transactions.

We rely heavily on communications, data processing and other information processing systems to conduct and support our business, many of which are provided through third-parties. If our third party providers encounter difficulties or become the source of an attack on or breach of their operational systems, data or infrastructure, or if we have difficulty communicating with any such third party system, our business operations could suffer. Any failure or disruption to our systems, or those of a third party provider, could impede our transaction processing, service delivery, customer relationship management, data processing, financial reporting or risk management. Our computer systems, software and networks, and those of our third party providers, may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses, denial of service attacks, malicious social engineering or other malicious code, or cyber-attacks that circumvent our prevention measures or are beyond what we can reasonably anticipate, and such events could result in material loss. Additionally, we could suffer disruptions to our systems or damage to our network infrastructure from events that are wholly or partially beyond our control, such as electrical or telecommunications outages, natural disasters, widespread health emergencies or pandemics, or events arising from local or larger scale political events, including terrorist acts. Furthermore, in light of rapid technological advancements, we must continually mature our cybersecurity risk management program to address emerging risks. If significant failure, interruption or security breaches do occur in our processing systems or those of our third party providers, we could suffer significant damage to our reputation, a loss of customer business, additional regulatory scrutiny, or exposure to civil litigation, additional costs and possible financial liability.

Due the nature of our business, we regularly process transfers of large amounts of money to and from our clients’ accounts. To do so, we are dependent on the actions of our employees and instructions from our clients and, therefore, we are exposed to operational and fraud risks. We could be materially adversely affected from a financial or reputational perspective if our employees cause a significant operational failure that leads to significant client loss. Additionally, if our clients are victim to operational failure or fraud by their own employees or third parties relating to their accounts with us, we could suffer reputational harm and loss of business even if we have no liability for such failure or fraud.

The loss of one or more key employees or lending teams may adversely affect our business.

We are a relationship-driven organization. Our continued growth and development is dependent in large part upon the efforts of our key relationship managers who have primary contact with our clients and responsibility for maintaining personalized relationships with our client base. These personalized relationships are a key aspect of our business strategy. The loss of one or more of these key employees, or a lending team, could have a material adverse effect on our business if we are unable to hire

25

suitable replacements or we are unable to successfully retain the client relationships of departing employees. Uncertainty about the effect of the pending CIBC merger, or about the timing of closing the merger, could impact our ability to retain key employees during the pendency of the merger.

We have counterparty risk; the creditworthiness of other financial institutions could expose us to losses on contracts we have with these institutions and adversely affect our ability to provide services to our clients, specifically products and services relating to foreign exchange, interest rate derivatives and letters of credit.

Our ability to provide certain products and services could be adversely affected by the actions and financial health of other banks. Banks are interrelated as a result of lending, clearing, correspondent, counterparty and other relationships. As a result, defaults by, or even rumors or questions about, one or more banks, or the banking industry generally, have in the past led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of the transactions engaged in by us in the ordinary course of business, particularly in our capital markets group, expose us to credit risk in the event of default of a financial institution counterparty. While we hold collateral in most such transactions, collateral may be insufficient to mitigate our losses, as we may be unable to realize or liquidate at prices sufficient to recover the full amount of our exposure. Such losses could have a material and adverse effect on our financial condition and results of operations.

Our capital markets group offers to clients a range of foreign exchange and interest rate derivatives products. Although we do not engage in any proprietary trading and we structure these client-generated trading activities to mitigate our exposure to market risk, we remain exposed to various risks, the most significant of which is counterparty risk, which may be most significant in foreign exchange transactions where timing differences between settlement centers can result in us paying the counterparty before actually receiving the funds. In addition, for swaps we execute with counterparties to mitigate the market risk of our customer trades, we may be required to post collateral to secure our obligations related to those trades; if such a counterparty invokes the protection of insolvency laws, then the collateral posted to secure our obligations to that counterparty may be trapped with, and potentially subject to claims of creditors of, that counterparty.

We are highly regulated and may be adversely affected by a failure to comply with banking laws, regulations and regulatory expectations or changes in such laws, regulations and regulatory expectations.

We, like all banking organizations, are subject to extensive supervision, regulation and examination. This regulatory structure gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies to address not only compliance with applicable laws and regulations (including laws and regulations governing consumer protection, fair lending, privacy, information security and anti-money laundering and anti-terrorism laws), but also capital adequacy, asset quality, risk management, management ability and performance, earnings, liquidity, and various other factors. Under this structure, the regulatory agencies have broad discretion to impose restrictions and limitations on our operations if they determine, among other things, that our operations are unsafe or unsound, fail to comply with applicable law or regulations or are otherwise inconsistent with regulatory expectations or with the supervisory policies of these agencies. This supervisory framework could materially impact the conduct, growth and profitability of our operations. For example, regulatory scrutiny of compliance with consumer lending and protection laws and regulations has increased significantly over the past several years since the creation of the CFPB following enactment of the Dodd-Frank Act, particularly with respect to “unfair, deceptive or abusive” acts or practices and alleged fair lending violations. A failure by us to comply with applicable laws and regulations or expectations of our regulators (including the CFPB) relating to safe and sound banking or compliance practices could result in regulatory sanctions, civil money penalties or other 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.

Changes in laws, regulations and other regulatory requirements affecting the financial services industry, and the effects of such changes, are difficult to predict and may have unintended consequences. New regulations or changes in the regulatory environment could limit the types of financial services and products we may offer, the demand for existing products and services, and/or increase the ability of non-banks to offer competing financial services and products, among other things. We may incur increased costs related to additional staffing, professional services and information technology resources to support compliance or data collection and data analytics to satisfy evolving expectations for enhanced risk and liquidity management processes and new regulatory reporting requirements.

Since the U.S. federal elections in November 2016, there has been significant discussion about future financial regulatory reform. For example, in February 2017, President Trump issued an executive order calling for the U.S. Treasury Secretary to consult with the federal banking agencies and deliver a report on how existing financial regulation aligns with core principles articulated in the order to guide regulatory reform. Additionally, the Financial CHOICE Act has been introduced in the House Financial Services Committee, which would make intricate changes to the Dodd-Frank Act, such as provide a Dodd-Frank off-ramp for highly-rated banking organizations that satisfy a heightened leverage ratio requirement, repeal the Volcker Rule and Durbin Amendment, revamp

26

the CFPB and eliminate or substantially modify the federal banking agencies’ authority to exercise extraordinary powers in financial crises. At this time, it is uncertain whether or to what extent the executive order or proposed legislation such as the Financial CHOICE Act will result in any material changes to current financial industry laws and regulations and, if so, to what extent such changes would impact the Company, or the competitive landscape in the banking and broader financial services industry.

Changes in taxes and other assessments may significantly impact us and our clients.

The legislatures and administrations in the U.S. and state and local tax jurisdictions in which we operate regularly enact reforms to the tax and other assessment regimes to which we and our clients are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes. Any change in tax law, such as proposed changes to the statutory U.S. federal corporate income tax rate that has been discussed by Congress and the new U.S. Presidential administration, the current tax depreciation system and the deductibility of interest expense, or any other change made in connection with any comprehensive U.S. federal tax reform, may affect our tax position and the tax position and financial performance of our clients. The effects of these changes and any other changes that result from enactment of potential tax reforms cannot be quantified and there can be no assurance that any such reforms would not have an adverse effect upon our financial performance or our business, in part due to the impact on our clients. For example, if U.S. federal tax reform included a reduction in the deductibility of interest expense, that could impact the cash flow of our borrowers. Although a reduction in the statutory U.S. federal corporate rate may lower our tax provision expense in future periods, it may also significantly decrease the value of our deferred tax asset which would result in a reduction of net income in the period in which the tax change is enacted.

Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.

We conduct business in the highly competitive financial services industry, which has been and continues to be impacted by significant and increasing government regulation, increasing technological demands and disruption and the presence of many new non-bank competitors. Our future success will depend on our ability to compete effectively in this environment. With respect to our Commercial Banking business, we compete primarily with super-regional and national commercial banks, asset-based non-bank lenders and commercial mortgage banking companies. Many of these competitors have substantially greater financial resources, lending limits and larger office and branch networks, and greater access to lower cost deposits and capital, than we do and therefore may be able to compete more effectively on loan pricing or terms and/or offer products and services beyond what we offer. In recent years, in which credit costs and interest rates have been low, we have experienced significant competitive pressure in pricing and structuring loans in certain of our loan segments. Because we generate earnings primarily from the difference between the interest earned on loans and the interest we pay on deposits, this pricing pressure has impacted, and is expected to continue impacting, our margins.

Remaining competitive will require ongoing investments in technology to satisfy expectations of our clients, enhance service delivery, support new products and services and efficiently grow our business. Additionally, increasing our retail deposit gathering capabilities in a competitive environment may require significant investments by us, such as by enhancing digital strategies, opening new branches or acquiring retail deposit franchises, which also could impact our results of operations.

Risk Factors Related to the Merger

We will be subject to business uncertainties and contractual restrictions while the merger is pending, which could adversely affect our business.

Uncertainty about the effect of the merger on our employees and clients may have an adverse effect on the Company and, consequently, the surviving corporation. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is completed, and could cause clients and others that deal with us to seek to change our existing business relationships. Retention of certain employees may be challenging during the pendency of the merger, as certain employees may experience uncertainty about their future roles. If key employees depart because of issues relating to uncertainty about the timing of closing the merger, the uncertainty and difficulty of integration or a desire not to remain with the business, our business prior to the merger (and CIBC’s business following the merger) could be negatively impacted. In addition, until the merger occurs, the merger agreement restricts us from making certain acquisitions or entering into new lines of business, entering into or modifying material contracts and taking other specified actions without the consent of CIBC. These restrictions may prevent or delay us from pursuing attractive business opportunities that may arise prior to the completion of the merger. The merger agreement also restricts us from increasing our dividend prior to the merger.


27

The merger agreement may be terminated in accordance with its terms and the merger may not be completed.

The merger agreement is subject to a number of conditions that must be fulfilled in order to complete the merger. Those conditions include, among others, the approval of the merger proposal by our stockholders, the receipt of all required regulatory approvals (which include approvals of the Office of the Superintendent of Financial Institutions (Canada), the Federal Reserve Board and the Illinois Department of Financial and Professional Regulation) and expiration or termination of all statutory waiting periods in respect thereof, the accuracy of representations and warranties under the merger agreement (subject to the materiality standards set forth in the merger agreement), CIBC’s and the Company’s performance of their respective obligations under the merger agreement in all material respects and each of CIBC’s and the Company’s receipt of a tax opinion to the effect that the merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Code. These conditions to the closing of the merger may not be fulfilled in a timely manner or at all and, accordingly, the merger may be delayed or may not be completed.

In addition, if the merger is not completed by June 29, 2017, either CIBC or the Company may choose not to proceed with the merger, and the parties can mutually decide to terminate the merger agreement at any time, before or after our stockholder approval has been obtained. In addition, CIBC and the Company may elect to terminate the merger agreement in certain other circumstances. If the merger agreement is terminated under certain circumstances, we may be required to pay a termination fee of $150 million to CIBC.

Failure to complete the merger at all, or a material delay in completing the merger, could negatively impact our stock price and future business and financial results.

If the merger is not completed for any reason, including as a result of our stockholders declining to approve the merger agreement or the failure of the parties to obtain the required regulatory approvals, or if we and CIBC experience a material delay in completing the merger, our stock price and ongoing business may be adversely affected. In such case, we would be subject to a number of risks, including the following:

•
we may experience negative reactions from the financial markets;
•
our stock price, as well as the prices for our publicly-traded debt securities, could be materially impacted due to changing expectations from market participants about the timing or likelihood of completion of the merger and our future prospects;
•
we may experience negative reactions from our clients, employees and/or vendors, and if there is a material delay in completing the merger, we may find it more challenging to retain our clients and key employees due to the perceived uncertainty about the transaction;
•
we will have incurred substantial transaction-related expenses and will be required to pay certain costs relating to the merger, whether or not the merger is completed;
•
the merger agreement places certain restrictions on the conduct of our businesses prior to completion of the merger and such restrictions (the waiver of which is subject to the reasonable consent of CIBC) may prevent or delay us from making certain acquisitions or entering into new lines of business, entering into or modifying material contracts and taking other specified actions without the consent of CIBC during the pendency of the merger;
•
matters relating to the merger (including integration planning) require substantial commitments of time and resources by our management, which would otherwise have been devoted to other opportunities that may have been beneficial to us as an independent company; and
•
during the pendency of the merger, our stock price is likely to be impacted by factors affecting CIBC’s ongoing business, prospects and stock price because a majority of the merger consideration is in the form of CIBC common shares; the longer period of time that the merger is pending, the more our stockholders (including employee stockholders) may be exposed to fluctuations in the price of CIBC common shares, which could have an adverse impact on our business.

In addition to the above risks, if the merger agreement is terminated and our board of directors seeks another merger or business combination, our stockholders cannot be certain that we will be able to find a party willing to offer equivalent or more attractive consideration than the consideration CIBC has agreed to provide in the merger.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.


28

ITEM 2. PROPERTIES

The executive offices of PrivateBancorp are located in downtown Chicago, Illinois at 120 South LaSalle Street. This building which houses a majority of our general corporate functions is leased from an unaffiliated third party. We conduct our business primarily through the Bank at 23 full-service banking office locations in the greater Chicago, Detroit, Milwaukee, and St. Louis metropolitan areas. We also have business development offices located in Colorado, Connecticut, Florida, Georgia, Indiana, Iowa, Michigan, Minnesota, Missouri, Ohio and Pennsylvania. With the exception of 11 offices that are owned by us, all other facilities are leased from unaffiliated third parties. At certain Bank locations, excess space is leased to third parties.

We also own 30 automated teller machines (“ATMs”) primarily located at our banking facilities.

We believe our facilities in the aggregate are suitable and adequate to operate our banking and related business. Additional information with respect to premises, equipment and lease arrangements is presented in Note 6 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

ITEM 3. LEGAL PROCEEDINGS

Following the announcement of the proposed transaction with CIBC, three putative class actions were filed on behalf of our public stockholders in the Circuit Court of Cook County, Chicago, Illinois. The three actions have been consolidated and styled In re PrivateBancorp, Inc. Shareholder Litigation, 2016-CH-08949. All of the actions name as defendants the Company and each of its directors individually, and assert that the directors breached their fiduciary duties in connection with the proposed transaction. Two of the complaints are also brought against CIBC and assert that the Company and CIBC aided and abetted the directors’ alleged breaches. The actions broadly allege that the transaction was the result of a flawed process, that the price is unfair, and that certain provisions of the merger agreement might dissuade a potential suitor from making a competing offer, among other things. The plaintiffs subsequently filed an amended complaint, adding a claim alleging breaches of the fiduciary duty of disclosure by the directors. Plaintiffs seek injunctive and other relief, including damages. The plaintiffs in the three actions have agreed in principle not to pursue the actions as a result of the inclusion of certain additional disclosures in the proxy statement for the Company’s special meeting of stockholders. The defendants, including the Company, believe the demands and complaints are without merit and there are substantial legal and factual defenses to the claims asserted, and the proxy statement for the special meeting disclosed all material information prior to the inclusion of the additional disclosures.

As of December 31, 2016, and in the ordinary course of business, there were various other legal proceedings pending against the Company and our subsidiaries that are incidental to our regular business operations. Management does not believe that the outcome of any of these proceedings will have, individually or in the aggregate, a material adverse effect on our business, results of operations, financial condition or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


29

PART II
 
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded under the symbol “PVTB” on the NASDAQ Global Select Market. As of February 27, 2017, we had approximately 438 stockholders of record. The following table sets forth the high and low intraday sales prices and quarter-end closing price of our common stock, dividends declared per share, dividend yield and book value per share during each quarter of 2016 and 2015. As of February 27, 2017, the closing market price of our common stock was $56.93 per share.
 
 
2016
 
2015
 
Fourth
 
Third
 
Second
 
First
 
Fourth
 
Third
 
Second
 
First
Market price of common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High
$
55.12

 
$
46.70

 
$
44.84

 
$
41.81

 
$
45.79

 
$
42.93

 
$
41.44

 
$
36.95

 
Low
$
44.18

 
$
42.60

 
$
34.00

 
$
31.18

 
$
35.76

 
$
33.70

 
$
34.52

 
$
29.62

 
Quarter-end
$
54.19

 
$
45.92

 
$
44.03

 
$
38.60

 
$
41.02

 
$
38.33

 
$
39.82

 
$
35.17

 
Cash dividends declared per share
$
0.01

 
$
0.01

 
$
0.01

 
$
0.01

 
$
0.01

 
$
0.01

 
$
0.01

 
$
0.01

 
Dividend yield at quarter-end (1)
0.07
%
 
0.09
%
 
0.09
%
 
0.10
%
 
0.10
%
 
0.10
%
 
0.10
%
 
0.11
%
 
Book value per share at quarter-end
$
24.04

 
$
23.64

 
$
23.04

 
$
22.29

 
$
21.48

 
$
20.90

 
$
20.13

 
$
19.61

(1) 
Ratios are presented on an annualized basis.

Payment of future dividends is within the discretion of the Board and will depend on the capital adequacy of the Company and the Bank. The Board does not have any current plans to increase future dividends, as our current strategy is focused on retaining capital to support growth in our balance sheet. The Board evaluates dividends on a quarterly basis and may adjust those plans from time to time; however, the merger agreement that we have entered into with CIBC restricts us from increasing our dividend prior to the merger without the prior consent of CIBC, which we would not expect to receive. A discussion regarding the restrictions applicable to our ability and the ability of the Bank to pay dividends to us is included in the “Bank Holding Company Regulation- Dividends” and “Bank Regulation-Dividends” sections of “Supervision and Regulation” in Item 1 and Note 16 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.


30

Stock Performance Graph

The graph and table below illustrate, over a five-year period, the cumulative total return (defined as stock price appreciation plus dividends) to stockholders from an investment in our common stock against a published industry total return equity index and broad-market total return equity index. The published industry total return equity indices used in this comparison are the Center for Research in Security Prices index for NASDAQ Bank Stocks and the S&P Regional Banking Industry Index, and the broad-market total return equity index used in this comparison is the Russell 2000 Index. In 2017, we changed our published industry total return equity index from the NASDAQ Bank Index to the S&P Regional Banking Index. The S&P Regional Banking Index further aligns us with other banks of a relatively similar size.

pvtb123120_chart-29182a05.jpg

Comparison of Five-Year Cumulative Total Return Among
PrivateBancorp, Inc., the NASDAQ Bank Index, and the Russell 2000 Index (1) 
 
 
December 31,
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
PrivateBancorp
$
100.00

 
$
139.90

 
$
264.67

 
$
305.98

 
$
376.17

 
$
497.40

NASDAQ Bank Index
100.00

 
118.69

 
168.21

 
176.48

 
192.08

 
265.02

Russell 2000 Index
100.00

 
116.35

 
161.52

 
169.43

 
161.95

 
196.45

S&P Regional Banking Industry Index
100.00

 
117.37

 
173.61

 
177.69

 
187.32

 
253.66

(1) 
Assumes $100 invested on December 31, 2011 in PrivateBancorp’s common stock, the NASDAQ Bank Index, the Russell 2000 Index, and the S&P Regional Banking Industry Index with the reinvestment of all related dividends.

To the extent this Form 10-K is incorporated by reference into any other filing by us under the Securities Act of 1933 or the Securities Exchange Act of 1934, the foregoing “Stock Performance Graph” will not be deemed incorporated, unless specifically provided otherwise in such filing and shall not otherwise be deemed filed under such Acts.


31

Issuer Purchases of Equity Securities

The following table summarizes the Company’s monthly common stock purchases during the quarter ended December 31, 2016, which were made solely in connection with the administration of employee share-based compensation plans for employees. 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.

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
October 1 - October 31, 2016
509

 
$
45.51

 
—

 
—

November 1 - November 30, 2016
222

 
44.90

 
—

 
—

December 1 - December 31, 2016
245

 
53.31

 
—

 
—

Total
976

 
$
47.33

 
—

 
—


Unregistered Sales of Equity Securities

None.


32

ITEM 6. SELECTED FINANCIAL DATA

Consolidated financial information reflecting a summary of our operating results and financial condition for each of the five years in the period ended December 31, 2016 is presented in the following table. This summary should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this Form 10-K. A more detailed discussion and analysis of the factors affecting our operating results and financial condition is presented in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.
 
 
Year Ended December 31,
(Dollars in thousands, except per share data)
2016
 
2015
 
2014
 
2013
 
2012
Operating Results
 
 
 
 
 
 
 
 
 
Interest income
$
665,018

 
$
582,212

 
$
524,387

 
$
492,238

 
$
487,036

Interest expense
82,592

 
67,797

 
69,650

 
71,175

 
67,103

Net interest income
582,426

 
514,415

 
454,737

 
421,063

 
419,933

Provision for loan and covered loan losses
33,710

 
14,790

 
12,044

 
31,796

 
71,425

Fee revenue (1)
146,647

 
129,190

 
117,060

 
112,816

 
111,246

Net securities gains (losses)
1,111

 
822

 
530

 
1,174

 
(205
)
Non-interest expense
372,473

 
333,237

 
312,076

 
303,314

 
327,132

Income before income taxes
324,001

 
296,400

 
248,207

 
199,943

 
132,417

Income tax provision
115,644

 
111,089

 
95,128

 
76,994

 
54,521

Net income
208,357

 
185,311

 
153,079

 
122,949

 
77,896

Preferred stock dividends and discount accretion
—

 
—

 
—

 
—

 
13,368

Net income available to common stockholders
$
208,357

 
$
185,311

 
$
153,079

 
$
122,949

 
$
64,528

Weighted-average common shares outstanding
78,900

 
77,968

 
77,007

 
76,398

 
71,951

Weighted-average diluted common shares outstanding
80,484

 
79,206

 
77,822

 
76,645

 
72,174

Selected Operating Statistics
 
 
 
 
 
 
 
 
 
Net revenue (2)
$
735,036

 
$
648,749

 
$
575,560

 
$
538,300

 
$
533,847

Operating profit (2)
362,536

 
315,512

 
263,484

 
234,986

 
206,715

Provision for loan losses (3)
$
33,954

 
$
14,667

 
$
13,169

 
$
31,164

 
$
70,876

Effective tax rate
35.7
%
 
37.5
%
 
38.3
%
 
38.5
%
 
41.2
%
Per Share Data
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
2.62

 
$
2.36

 
$
1.96

 
$
1.58

 
$
0.88

Diluted earnings per share
2.57

 
2.32

 
1.94

 
1.57

 
0.88

Cash dividends declared
0.04

 
0.04

 
0.04

 
0.04

 
0.04

Book value at year end
24.04

 
21.48

 
18.95

 
16.75

 
15.65

Tangible book value at year end (2)(4)
22.85

 
20.25

 
17.67

 
15.43

 
14.26

Market price at year end
$
54.19

 
$
41.02

 
$
33.40

 
$
28.93

 
$
15.32

Dividend payout ratio
1.53
%
 
1.69
%
 
2.04
%
 
2.53
%
 
4.55
%
Performance Ratios
 
 
 
 
 
 
 
 
 
Return on average common equity
11.36
%
 
11.57
%
 
10.91
%
 
9.76
%
 
5.76
%
Return on average assets
1.13
%
 
1.13
%
 
1.04
%
 
0.90
%
 
0.60
%
Return on average tangible common equity (2)
12.06
%
 
12.43
%
 
11.90
%
 
10.82
%
 
6.54
%
Net interest margin (2)
3.30
%
 
3.26
%
 
3.22
%
 
3.23
%
 
3.42
%
Efficiency ratio (2)(5)
50.67
%
 
51.37
%
 
54.22
%
 
56.35
%
 
61.28
%

33

ITEM 6. SELECTED FINANCIAL DATA (continued)

 
December 31,
(Dollars in thousands)
2016
 
2015
 
2014
 
2013
 
2012
Credit Quality (3)
 
 
 
 
 
 
 
 
 
Nonperforming loans
$
83,688

 
$
53,749

 
$
67,544

 
$
94,238

 
$
138,780

OREO
10,203

 
7,273

 
17,416

 
28,548

 
81,880

Total nonperforming assets
$
93,891

 
$
61,022

 
$
84,960

 
$
122,786

 
$
220,660

Restructured loans accruing interest
$
66,002

 
$
16,546

 
$
22,745

 
$
20,176

 
$
60,980

Net charge-offs
$
8,925

 
$
6,429

 
$
3,780

 
$
49,472

 
$
101,053

Total nonperforming loans to total loans
0.56
%
 
0.41
%
 
0.57
%
 
0.89
%
 
1.37
%
Total nonperforming assets to total assets
0.47
%
 
0.35
%
 
0.54
%
 
0.87
%
 
1.57
%
Allowance for loan losses to total loans
1.23
%
 
1.21
%
 
1.28
%
 
1.34
%
 
1.59
%
Balance Sheet Highlights
 
 
 
 
 
 
 
 
 
Total assets
$
20,053,773

 
$
17,252,848

 
$
15,596,724

 
$
14,076,480

 
$
14,048,167

Average earning assets
17,821,134

 
15,923,831

 
14,206,113

 
13,129,470

 
12,369,945

Loans (3)
15,056,241

 
13,266,475

 
11,892,219

 
10,644,021

 
10,139,982

Allowance for loan losses (3)
(185,765
)
 
(160,736
)
 
(152,498
)
 
(143,109
)
 
(161,417
)
Deposits, excluding deposits held-for-sale
16,065,229

 
14,345,592

 
13,089,968

 
12,013,641

 
12,173,634

Noninterest-bearing deposits
5,196,587

 
4,355,700

 
3,516,695

 
3,172,676

 
3,690,340

Long-term debt
338,310

 
688,215

 
338,130

 
618,527

 
490,445

Equity
1,919,675

 
1,698,951

 
1,481,679

 
1,301,904

 
1,207,166

Capital Ratios
 
 
 
 
 
 
 
 
 
Total risk-based capital
12.49
%
 
12.37
%
 
12.51
%
 
13.30
%
 
13.17
%
Tier 1 risk-based capital
10.73
%
 
10.56
%
 
10.49
%
 
11.08
%
 
10.51
%
Tier 1 leverage ratio
10.28
%
 
10.35
%
 
9.96
%
 
10.37
%
 
9.56
%
Common equity Tier 1 ratio (6)
9.83
%
 
9.54
%
 
9.33
%
 
9.19
%
 
8.52
%
Tangible common equity to tangible assets (2)(7)
9.14
%
 
9.34
%
 
8.91
%
 
8.57
%
 
7.88
%
Average equity to average assets
9.99
%
 
9.75
%
 
9.56
%
 
9.22
%
 
10.12
%
Selected Information
 
 
 
 
 
 
 
 
 
Assets under management and administration
$
9,665,068

 
$
7,291,073

 
$
6,645,928

 
$
5,791,308

 
$
5,196,094

Full-time equivalent employees
1,301

 
1,219

 
1,168

 
1,116

 
1,105

 
(1) 
Computed as total non-interest income less net securities gains (losses) and loss on early extinguishment of debt.
(2) 
This is a non-U.S. GAAP financial measure. Refer to Table 25 of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K for a reconciliation from non-U.S. GAAP to U.S. GAAP.
(3) 
Excludes covered assets.
(4) 
Computed as total equity less preferred stock, goodwill, and other intangible assets divided by outstanding shares of common stock at end of year.
(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) 
Effective January 1, 2015, the common equity Tier 1 ratio became a required regulatory capital measure and is calculated in accordance with the new capital rules. Refer to Table 25, “Non-U.S. GAAP Financial Measures” for a reconciliation from non-U.S. GAAP to U.S. GAAP for periods prior to 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.


34

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion and analysis highlights the significant factors affecting our consolidated statements of income for the years ended 2016, 2015, and 2014 and consolidated statements of financial condition as of December 31, 2016 and 2015. When we use the terms “PrivateBancorp,” the “Company,” “we,” “us,” and “our,” we mean PrivateBancorp, Inc. and its consolidated subsidiaries. When we use the term “the Bank,” we are referring to our wholly-owned banking subsidiary, The PrivateBank and Trust Company. The following discussion should be read in conjunction with the consolidated financial statements, accompanying notes thereto, and other financial information presented in this Form 10-K.

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.

PENDING TRANSACTION WITH CANADIAN IMPERIAL BANK OF COMMERCE

On June 29, 2016, the Company entered into a definitive merger agreement with Canadian Imperial Bank of Commerce (“CIBC”), a Canadian chartered bank, and CIBC Holdco Inc. (“Holdco”), a newly-formed Delaware corporation and a direct, wholly owned subsidiary of CIBC, which contemplates that the Company will merge with and into Holdco, with Holdco surviving the merger. Closing of the transaction remains subject to the receipt of required regulatory and stockholder approvals and other customary closing conditions. Following the merger, the Bank will be headquartered in Chicago, Illinois, retain its Illinois state banking charter and be an indirect, wholly owned subsidiary of CIBC.

OVERVIEW

For 2016, net income available to common stockholders was $208.4 million, increasing $23.0 million, or 12%, from 2015. Diluted earnings per share were $2.57 for 2016, an increase of 11% compared to $2.32 per diluted share for 2015. Results for the current year included $6.7 million of transaction-related expenses related to the pending merger with CIBC, which reduced earnings per share by $0.05 on an after-tax basis. Our return on average assets of 1.13% for 2016 was consistent with the prior year, and our return on average common equity was 11.4%, compared to 11.6% for 2015.

Net interest income increased by $68.0 million, or 13%, compared to 2015, reflecting higher interest income from $1.9 billion of growth in average interest-earning assets and the impact from a rise in short-term rates. Net interest margin was 3.30% for 2016, increasing four basis points from the prior year, primarily due to increased loan yields and the benefit from continued growth in noninterest-bearing funds in a higher rate environment, offset in part by increased costs for interest-bearing funds.

Non-interest income for the current year was $147.8 million, a 14% increase from 2015, with growth in all major fee categories, excluding deposit service charges and fees and other income as 2015 included a $4.1 million gain on the sale of our Georgia branch. As a result of the growth in net interest income and non-interest income, net revenue increased $86.3 million from 2015. Non-interest expense increased 12% from prior year, primarily due to higher salary and employee benefit expense, professional services and technology costs.

Growth in earning assets continued to benefit operating profit, which increased 15% from $315.5 million for 2015 to $362.5 million for 2016. The efficiency ratio was 50.7% for the year ended December 31, 2016 and included the impact of the $6.7 million in transaction-related expenses, compared to 51.4% for the year ended December 31, 2015.

Total loans grew $1.8 billion, or 13%, to $15.1 billion at December 31, 2016, primarily driven by growth in commercial and industrial and commercial real estate (“CRE”) loans. Total commercial loans and CRE loans comprised 64% and 27%, respectively, of total loans at December 31, 2016, compared to 65% and 25%, respectively, at December 31, 2015.

Asset quality remained strong, with nonperforming loans representing 0.56% of total loans at December 31, 2016, compared to 0.41% at December 31, 2015. The provision for loan losses, excluding covered assets, increased to $34.0 million in 2016 from $14.7 million in 2015, reflecting the impact of $1.8 billion in loan growth and some credit migration during the year. The provision for loan loss will fluctuate from period to period depending on the level of loan growth and unevenness in credit quality due to the size of individual credits. At December 31, 2016, our allowance for loan losses as a percentage of total loans was 1.23%, compared to 1.21% at December 31, 2015. The ratio of net charge-offs to average loans outstanding for the year was 0.06% for

35

2016, relatively consistent with 2015. Nonperforming assets to total assets were 0.47% at December 31, 2016, compared to 0.35% at December 31, 2015.

Total deposits increased $1.7 billion, or 12%, from December 31, 2015 to $16.1 billion, primarily due to increases in noninterest-bearing and interest-bearing demand deposits and money market deposits. Noninterest-bearing demand deposits represented 32% of total deposits at December 31, 2016, up from 30% at the prior year end. Our deposit base is predominately comprised of commercial client balances, which will fluctuate from time to time based on our clients’ business and liquidity needs. During 2016, deposit funding was supplemented with short-term borrowings, which increased by $1.2 billion from December 31, 2015. The loan-to-deposit ratio was 93.7% at December 31, 2016, compared to 92.5% at the prior year end.

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 2016 performance, statement of financial condition, and liquidity.

RESULTS OF OPERATIONS

The profitability of our operations depends on our net interest income, provision for loan and covered loan losses, non-interest income, and non-interest expense. Net interest income is dependent on the amount of and yields earned on interest-earning assets as compared to the amount of and rates paid on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest as well as to the execution of our asset/liability management strategy. The provision for loan and covered loan losses is primarily affected by changes in the loan portfolio’s composition and performance, the identification of nonperforming loans and management’s assessment of the collectability of the loan portfolio, based on historical loss experience as well as current economic and market factors. Non-interest income consists primarily of fee revenue from asset management, mortgage banking, capital markets products, syndications, treasury management, loan and credit-related fees, and other services charges and fees. Net securities gains/losses, if any, are also included in non-interest income.

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 (1) the volume, pricing, mix and maturity of earning assets and interest-bearing liabilities; (2) the volume and value of noninterest-bearing sources of funds, such as noninterest-bearing deposits and equity; (3) the use of derivative instruments to manage interest rate risk; (4) 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, and repricing frequencies; (5) loan repayment behavior, which affects timing of recognition of certain loan fees as well as penalties; and (6) 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” in Item 8 of this 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.

Table 1 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 three years ended December 31, 2016. The table also presents the trend in net interest margin on a quarterly basis for 2016 and 2015, 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 of the major categories of interest-earning assets and interest-bearing liabilities and indicates the extent to which such variances are attributable to volume versus yield/rate changes.

36

Table 1
Net Interest Income and Margin Analysis
(Dollars in thousands)

 
2016
 
 
2015
 
 
2014
 
Average
Balance
 
Interest (1)
 
Yield/
Rate
 
 
Average
Balance
 
Interest (1)
 
Yield/
Rate
 
 
Average
Balance
 
Interest (1)
 
Yield/
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and interest-bearing deposits in banks
$
287,908

 
$
1,477

 
0.51
%
 
 
$
349,803

 
$
903

 
0.26
%
 
 
$
309,535

 
$
770

 
0.25
%
Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
2,919,718

 
62,542

 
2.14
%
 
 
2,440,429

 
55,283

 
2.27
%
 
 
2,279,054

 
53,500

 
2.35
%
Tax-exempt (2)
453,432

 
14,178

 
3.13
%
 
 
400,258

 
12,592

 
3.15
%
 
 
286,551

 
9,406

 
3.28
%
Total securities
3,373,150

 
76,720

 
2.27
%
 
 
2,840,687

 
67,875

 
2.39
%
 
 
2,565,605

 
62,906

 
2.45
%
FHLB stock
24,269

 
622

 
2.56
%
 
 
26,743

 
295

 
1.10
%
 
 
29,058

 
189

 
0.65
%
Loans, excluding covered assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
9,089,131

 
399,475

 
4.40
%
 
 
8,447,121

 
359,794

 
4.26
%
 
 
7,592,012

 
330,220

 
4.35
%
Commercial real estate
3,613,835

 
140,144

 
3.88
%
 
 
3,052,095

 
114,868

 
3.76
%
 
 
2,568,603

 
93,123

 
3.63
%
Construction
582,799

 
23,156

 
3.97
%
 
 
433,123

 
17,245

 
3.98
%
 
 
360,711

 
14,152

 
3.92
%
Residential
530,769

 
18,379

 
3.46
%
 
 
430,332

 
15,145

 
3.52
%
 
 
359,621

 
13,299

 
3.70
%
Personal and home equity
295,061

 
9,331

 
3.16
%
 
 
313,758

 
9,353

 
2.98
%
 
 
348,815

 
10,552

 
3.03
%
Total loans, excluding covered assets (3)
14,111,595

 
590,485

 
4.18
%
 
 
12,676,429

 
516,405

 
4.07
%
 
 
11,229,762

 
461,346

 
4.11
%
Covered assets (4)
24,212

 
566

 
2.34
%
 
 
30,169

 
1,056

 
3.50
%
 
 
72,153

 
2,409

 
3.34
%
Total interest-earning assets (2)
17,821,134

 
$
669,870

 
3.76
%
 
 
15,923,831

 
$
586,534

 
3.69
%
 
 
14,206,113

 
$
527,620

 
3.71
%
Cash and due from banks
184,166

 
 
 
 
 
 
176,586

 
 
 
 
 
 
154,334

 
 
 
 
Allowance for loan and covered loan losses
(177,316
)
 
 
 
 
 
 
(165,994
)
 
 
 
 
 
 
(161,001
)
 
 
 
 
Other assets
532,947

 
 
 
 
 
 
495,437

 
 
 
 
 
 
478,025

 
 
 
 
Total assets
$
18,360,931

 
 
 
 
 
 
$
16,429,860

 
 
 
 
 
 
$
14,677,471

 
 
 
 
Liabilities and Equity: (5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
1,620,817

 
$
5,221

 
0.32
%
 
 
$
1,447,298

 
$
3,845

 
0.27
%
 
 
$
1,289,190

 
$
3,728

 
0.29
%
Savings deposits
401,485

 
1,941

 
0.48
%
 
 
341,709

 
1,434

 
0.42
%
 
 
293,316

 
912

 
0.31
%
Money market accounts
6,017,268

 
25,601

 
0.43
%
 
 
5,799,593

 
18,735

 
0.32
%
 
 
4,966,272

 
15,945

 
0.32
%
Time deposits
2,326,362

 
25,811

 
1.11
%
 
 
2,389,460

 
23,092

 
0.97
%
 
 
2,623,243

 
21,366

 
0.81
%
Total interest-bearing deposits
10,365,932

 
58,574

 
0.57
%
 
 
9,978,060

 
47,106

 
0.47
%
 
 
9,172,021

 
41,951

 
0.46
%
Short-term borrowings
759,701

 
3,413

 
0.45
%
 
 
230,402

 
656

 
0.28
%
 
 
42,797

 
638

 
1.49
%
Long-term debt
488,399

 
20,605

 
4.22
%
 
 
548,075

 
20,035

 
3.66
%
 
 
618,556

 
27,061

 
4.37
%
Total interest-bearing liabilities
11,614,032

 
82,592

 
0.71
%
 
 
10,756,537

 
67,797

 
0.63
%
 
 
9,833,374

 
69,650

 
0.71
%
Noninterest-bearing demand deposits
4,694,213

 
 
 
 
 
 
3,915,032

 
 
 
 
 
 
3,308,345

 
 
 
 
Other liabilities
217,924

 
 
 
 
 
 
156,840

 
 
 
 
 
 
132,220

 
 
 
 
Equity
1,834,762

 
 
 
 
 
 
1,601,451

 
 
 
 
 
 
1,403,532

 
 
 
 
Total liabilities and equity
$
18,360,931

 
 
 
 
 
 
$
16,429,860

 
 
 
 
 
 
$
14,677,471

 
 
 
 
Net interest spread (2)
 
 
 
 
3.05
%
 
 
 
 
 
 
3.06
%
 
 
 
 
 
 
3.00
%
Contribution of noninterest-bearing sources of funds
 
 
 
 
0.25
%
 
 
 
 
 
 
0.20
%
 
 
 
 
 
 
0.22
%
Net interest income/margin (2)
 
 
587,278

 
3.30
%
 
 
 
 
518,737

 
3.26
%
 
 
 
 
457,970

 
3.22
%
Less: tax equivalent adjustment
 
 
4,852

 
 
 
 
 
 
4,322

 
 
 
 
 
 
3,233

 
 
Net interest income, as reported
 
 
$
582,426

 
 
 
 
 
 
$
514,415

 
 
 
 
 
 
$
454,737

 
 
(footnotes on following page)


37

Quarterly Net Interest Margin Trend
 
 
2016
 
2015
 
Fourth
 
Third
 
Second
 
First
 
Fourth
 
Third
 
Second
 
First
Yield on interest-earning assets (2)
3.70
%
 
3.65
%
 
3.74
%
 
3.74
%
 
3.67
%
 
3.65
%
 
3.60
%
 
3.65
%
Cost of interest-bearing liabilities
0.73
%
 
0.72
%
 
0.70
%
 
0.68
%
 
0.64
%
 
0.63
%
 
0.62
%
 
0.63
%
Net interest spread (2)
2.97
%
 
2.93
%
 
3.04
%
 
3.06
%
 
3.03
%
 
3.02
%
 
2.98
%
 
3.02
%
Contribution of noninterest-bearing sources of funds
0.26
%
 
0.25
%
 
0.24
%
 
0.24
%
 
0.22
%
 
0.21
%
 
0.19
%
 
0.19
%
Net interest margin (2)
3.23
%
 
3.18
%
 
3.28
%
 
3.30
%
 
3.25
%
 
3.23
%
 
3.17
%
 
3.21
%
(1) 
Interest income included $31.1 million, $31.0 million, and $26.4 million in net loan fees for the years ended December 31, 2016, 2015, and 2014, respectively.
(2) 
Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%. This is a non-U.S. GAAP measure. Refer to Table 25, “Non-U.S. GAAP Financial Measures,” for a reconciliation of the effect of the tax-equivalent adjustment.
(3) 
Includes loans held-for-sale and nonaccrual loans. Average loans on a nonaccrual basis for the recognition of interest income totaled $71.3 million for 2016, $57.9 million for 2015, and $82.7 million for 2014. Interest foregone on impaired loans was estimated to be approximately $3.0 million for the year ended December 31, 2016, $2.3 million for 2015 and $3.2 million for 2014, calculated based on the average loan portfolio yield for the respective period.
(4) 
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 below entitled “Covered Assets” for a detailed discussion.
(5) 
2014 includes deposits held-for sale.


38

Table 2
Changes in Net Interest Income Applicable to Volumes and Interest Rates (1) 
(Amounts in thousands)
 
 
2016 compared to 2015
 
 
2015 compared to 2014
 
Volume
 
Rate
 
Total
 
 
Volume
 
Rate
 
Total
Federal funds sold and interest-bearing deposits in banks
$
(184
)
 
$
758

 
$
574

 
 
$
103

 
$
30

 
$
133

Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
10,395

 
(3,136
)
 
7,259

 
 
3,700

 
(1,917
)
 
1,783

Tax-exempt (2)
1,663

 
(77
)
 
1,586

 
 
3,592

 
(406
)
 
3,186

Total securities
12,058

 
(3,213
)
 
8,845

 
 
7,292

 
(2,323
)
 
4,969

FHLB stock
(29
)
 
356

 
327

 
 
(16
)
 
122

 
106

Loans, excluding covered assets:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
27,960

 
11,721

 
39,681

 
 
36,542

 
(6,968
)
 
29,574

Commercial real estate
21,693

 
3,583

 
25,276

 
 
18,085

 
3,660

 
21,745

Construction
5,947

 
(36
)
 
5,911

 
 
2,880

 
213

 
3,093

Residential
3,482

 
(248
)
 
3,234

 
 
2,514

 
(668
)
 
1,846

Personal and home equity
(574
)
 
552

 
(22
)
 
 
(1,047
)
 
(152
)
 
(1,199
)
Total loans, excluding covered assets
58,508

 
15,572

 
74,080

 
 
58,974

 
(3,915
)
 
55,059

Covered assets (3)
(183
)
 
(307
)
 
(490
)
 
 
(1,465
)
 
112

 
(1,353
)
Total interest-earning assets (2)
70,170

 
13,166

 
83,336

 
 
64,888

 
(5,974
)
 
58,914

Interest-bearing demand deposits
496

 
880

 
1,376

 
 
435

 
(318
)
 
117

Savings deposits
271

 
236

 
507

 
 
167

 
355

 
522

Money market accounts
727

 
6,139

 
6,866

 
 
2,691

 
99

 
2,790

Time deposits
(452
)
 
3,171

 
2,719

 
 
(1,511
)
 
3,237

 
1,726

Total interest-bearing deposits
1,042

 
10,426

 
11,468

 
 
1,782

 
3,373

 
5,155

Short-term borrowings
2,203

 
554

 
2,757

 
 
886

 
(868
)
 
18

Long-term debt
(2,320
)
 
2,890

 
570

 
 
(2,876
)
 
(4,150
)
 
(7,026
)
Total interest-bearing liabilities
925

 
13,870

 
14,795

 
 
(208
)
 
(1,645
)
 
(1,853
)
Net interest income (2)
$
69,245

 
$
(704
)
 
$
68,541

 
 
$
65,096

 
$
(4,329
)
 
$
60,767

(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 is presented on a tax-equivalent basis, assuming a federal income tax rate of 35%. Refer to Table 25, “Non-U.S. GAAP Financial Measures,” for a reconciliation of the effect of the tax-equivalent adjustment.
(3) 
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.

Net Interest Income - 2016 compared to 2015

Net interest income on a tax-equivalent basis increased by $68.5 million, or 13%, to $587.3 million for the year ended December 31, 2016, compared to $518.7 million for the prior year. Tax-equivalent interest income increased by $83.3 million from 2015, largely driven by $1.4 billion in average loan growth, which contributed $58.5 million to interest income on a comparative basis. The impact of higher short-term interest rates on our largely variable rate loan portfolio primarily drove a $15.6 million increase to interest income compared to the prior year. Securities interest income on a tax-equivalent basis grew $8.8 million from 2015, primarily due to growth in the portfolio, while security yields continued to compress in the low rate environment. Interest expense increased by $14.8 million from 2015, largely related to higher deposit costs of $11.5 million, reflecting deposits indexed to a higher Fed Funds effective rate, higher rates paid on certain money market accounts, and growth in average interest-bearing deposits of $387.9 million. Interest expense on short-term borrowings increased by $2.8 million from the prior year, reflecting higher average short-term FHLB advances and repurchase agreement balances during 2016.


39

Average interest-earning assets growth of $1.9 billion from the prior year was primarily driven by higher average loan balances of $1.4 billion, with $642.0 million of the growth related to commercial and industrial loans and $711.4 million in CRE and construction loans. In addition, average securities balances increased by $532.5 million from 2015. Average interest-bearing liabilities grew $857.5 million from the prior year, reflecting $387.9 million in higher average deposit balances, as well as $529.3 million in higher average short-term and secured borrowings, due to an increased use of short-term FHLB advances and, to a lesser extent, repurchase agreements during 2016.

Net interest margin was 3.30% for 2016, compared to 3.26% for 2015. The yield on interest-earning assets increased by seven basis points from the prior year. Overall loan yields increased by 11 basis points from 2015, as improvements related to higher short-term rates were partially offset by continued pricing reductions resulting from the competitive environment and a lower contribution from our hedging program. Our overall loan yields continue to be aided by our hedging program, although at a reduced level as compared to 2015 due to higher short-term rates and a decline in the notional value of the active hedge program. Compared to 2015, loan fees were relatively unchanged at $31.1 million for 2016. Excluding the impact from loan fees, hedging, and movement in LIBOR, loan yields have continued to compress in the current environment. The yield on our securities portfolio declined 12 basis points from the prior year, reflecting accelerated prepayment speeds and reduced yields on securities purchased in the low rate environment.

Our cost of funds for 2016 increased by eight basis points from 2015, driven primarily by higher rates paid on deposits. Deposit costs increased by ten basis points from the prior year, reflecting the repricing of deposits tied to a higher Fed funds effective rate, as well as higher rates paid on certain money market accounts. Deposits tied to the Fed funds effective rate totaled $1.6 billion at December 31, 2016. Average noninterest-bearing deposits and average equity, our principal sources of net noninterest-bearing funds, increased in aggregate by $1.0 billion from 2015, adding five basis points of value to net interest margin due to higher volume and the increased value of noninterest-bearing liabilities in a higher rate environment.

In the prolonged low interest rate environment, competition remains strong, which has influenced loan pricing and structure. As a result, we have experienced a general decline in our loan yields due to pricing compression on new loans, including within certain of our specialty businesses, and, to a lesser extent, on loan renewals in the current environment. Future loan yields may be impacted by fluctuations in loan fees driven by acceleration of unamortized origination fees upon early payoff or refinancing, and prepayment and other fees received on certain event-driven actions in accordance with the loan agreement, as well as interest income recognized upon recovery of interest on nonaccrual loans. Approximately 70 percent of the loan portfolio at year end was tied to one-month LIBOR, which was 77 basis points at December 31, 2016, compared to 43 basis points a year ago and 53 basis points at September 30, 2016, with most of the fourth quarter increase occurring in December. An additional 16 percent of our loan portfolio is tied to prime, which increased in mid-December. The interest rate moves during December 2016 are expected to be more impactful to loan yields during the first quarter 2017, as a meaningful portion of our variable loan portfolio reprices toward the beginning of the month.

To the extent short-term interest rates continue to rise, the impact on deposit costs for our indexed deposits has greater predictability than our non-indexed deposits. Deposit costs will depend on various factors including client behavior, pricing pressure within the bank marketplace and from non-bank alternatives, the mix of our funding sources, and prices for alternative sources of deposits and funds. Depending on the pace and rate of future increases in deposit costs, net interest margin could be impacted.

Net Interest Income - 2015 compared to 2014

Net interest margin was 3.26% for 2015, compared to 3.22% for 2014, as the improvements in cost of funds from the $75.0 million partial redemption of our 10% Debentures in October 2014 more than offset lower loan and securities yields. Although contractual loan yields declined by four basis points from the prior year period, overall loan yields benefited from our hedging program, specialty lending activity, and higher loan fees. The eight basis point decrease in cost of funds for the year was driven primarily by interest savings from the partial redemption of 10% Debentures and, to a lesser extent, reduced borrowing costs from lower short-term FHLB yields in 2015 compared to 2014. Deposit costs increased one basis point from the prior year period. Average noninterest-bearing deposits and average equity, our principal sources of net noninterest-bearing funds, increased in aggregate by $804.6 million from 2014, but the low interest rate environment during the period reduced their value within the net interest margin, decreasing two basis points from 2014 to 2015.

Non-interest Income

Non-interest income is derived from a number of sources including fees from our various commercial products and services such as the sale of derivative products through our capital markets group, treasury management services, lending and servicing and syndication activities, our asset management business, our mortgage banking business and deposit services to our retail clients.


40

The following table presents a break-out of these multiple sources of revenue for the years ended December 31, 2016, 2015 and 2014.

Table 3
Non-Interest Income Analysis
(Dollars in thousands)
 
 
Year Ended December 31,
 
% Change
 
2016
 
2015
 
2014
 
2016-2015
 
2015-2014
Asset management income:
 
 
 
 
 
 


 


Managed fee income
$
18,847

 
$
15,938

 
$
15,325

 
18

 
4

Custodian fee income
2,273

 
2,020

 
1,943

 
13

 
4

Total asset management fee income
21,120

 
17,958

 
17,268

 
18

 
4

Mortgage banking
15,895

 
14,079

 
10,245

 
13

 
37

Capital markets products
25,323

 
18,530

 
18,047

 
37

 
3

Treasury management
33,942

 
30,641

 
27,472

 
11

 
12

Loan, letter of credit and commitment fees
21,343

 
20,648

 
19,311

 
3

 
7

Syndication fees
20,956

 
17,205

 
19,514

 
22

 
-12

Deposit service charges and fees and other income (1)
8,068

 
10,129

 
5,203

 
-20

 
95

Subtotal fee revenue
146,647

 
129,190

 
117,060

 
14

 
10

Net securities gains (2) 
1,111

 
822

 
530

 
35

 
55

Total non-interest income
$
147,758

 
$
130,012

 
$
117,590

 
14

 
11

(1) 
Year ended December 31, 2015 includes $4.1 million gain on sale of our Georgia branch completed in January 2015.
(2) 
Year ended December 31, 2015 includes $466,000 of other-than-temporary impairment (“OTTI”) loss.

Non-interest Income - 2016 compared to 2015

Non-interest income for 2016 totaled $147.8 million, increasing $17.7 million, or 14%, from 2015. All fee revenue categories increased on a comparative basis, except deposits service charges and fees and other income as 2015 included a $4.1 million gain on the sale of our Georgia branch. Certain income sources, such as mortgage banking, capital markets products, and syndication fees, are transactional in nature and are significantly impacted by market forces (e.g., interest rates have a significant impact on mortgage banking volume and interest rate derivative products), and accordingly, tend to generate uneven income from period to period.

Assets under management and administration (“AUMA”) are impacted by the general performance in equity and fixed income markets. The pricing on asset management accounts varies depending on the type of services provided. Custody and escrow services involve safeguarding and administering client assets but do not involve investment management services. These assets are considered to be “non-managed” AUMA and have a significantly lower fee structure than “managed” AUMA. Managed AUMA are assets for which we provide investment management services, and fees from these assets are generally based on the market value of the assets on the last day of the prior quarter or month, which subject these fees to market volatility.

Asset management fee income increased $3.2 million, or 18%, from 2015, primarily related to fees earned from the addition of a single $2.4 billion corporate trust account (shown below in custody assets) during the first quarter 2015, growth in personal managed assets of 9%, and to a lesser extent, price adjustments on certain managed asset accounts. Funds in the large corporate trust account were gradually disbursed or redeployed over the course of 2016, with the account expected to be fully disbursed or redeployed by the end of 2017. Accordingly, the related contribution to our asset management fee income declined throughout 2016 and will continue to decline in 2017. Aggregate AUMA was $9.7 billion at December 31, 2016, growing $2.4 billion, or 33%, from the prior year, largely attributed to the previously mentioned sizeable corporate trust account, a large corporate retirement account added during second quarter 2016, and growth in personal managed assets.


41

The following table presents the composition of AUMA, as of the dates shown.

(Dollars in thousands)
As of December 31,
 
% Change
AUMA
2016
 
2015
 
2014
 
2016-2015
 
2015-2014
Personal managed
$
2,046,758

 
$
1,872,737

 
$
1,786,633

 
9
 
5
Corporate and institutional managed
2,643,041

 
1,787,187

 
1,347,299

 
48
 
33
Total managed assets
4,689,799

 
3,659,924

 
3,133,932

 
28
 
17
Custody assets (1)
4,975,269

 
3,631,149

 
3,511,996

 
37
 
3
Total AUMA
$
9,665,068

 
$
7,291,073

 
$
6,645,928

 
33
 
10
(1) 
December 31, 2016 included a corporate trust account of $791.6 million for which we serve as a trustee but do not provide investment management services.

Income from our mortgage banking business, which includes gains on loans sold and certain mortgage related loan fees, grew $1.8 million, or 13%, from 2015, driven by a higher volume of loans sold and improved spreads compared to the prior year. We sold $485.4 million of mortgage loans in the secondary marked in 2016, generating a net gain of $12.2 million, compared to $470.9 million of mortgage loans sold in 2015, generating a net gain of $10.7 million. Higher amounts of mortgage loans sold related to both refinance and new home purchases in 2016 exceeded prior year levels.

The following table presents the composition of capital markets income as of the dates shown.

 
Year Ended December 31,
 
% Change
(Dollars in thousands)
2016
 
2015
 
2014
 
2016-2015
 
2015-2014
Interest rate contracts
$
16,872

 
$
10,326

 
$
10,772

 
63

 
-4

Foreign exchange contracts
7,366

 
8,332

 
7,034

 
-12

 
18

Risk participation agreements
—

 
245

 
287

 
-100

 
-15

Total capital markets income, excluding credit valuation adjustment (“CVA”)
24,238

 
18,903

 
18,093

 
28

 
4

CVA
1,085

 
(373
)
 
(46
)
 
-391

 
711

Total capital markets products income
$
25,323

 
$
18,530

 
$
18,047

 
37

 
3


Capital markets products income was $25.3 million for 2016, increasing $6.8 million from 2015. Included in capital markets products income for 2016 was a $1.1 million positive CVA compared to a negative CVA of $373,000 for 2015. 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 increased by $5.3 million, or 28%, compared to 2015, reflecting higher average deal sizes, longer maturities, and higher spreads for interest rate contracts, partially offset by somewhat lower revenue in foreign exchange (“FX”) transactions as a result of spread compression. FX transactions generally provide a more stable source of fee income compared to the transactional nature of interest rate contracts, which are significantly influenced by clients’ views on the extent and timing of future interest rate movements. As shown in the table above, over the past three years, fees from interest rate contracts have fluctuated period to period due to both volume and size of transactions. Increased opportunities in the client interest rate derivatives business are expected in 2017 as a result of the meaningful interest rate movements in the fourth quarter 2016 and changing expectations about the timing and extent of future interest rate movements.

Treasury management income increased $3.3 million, or 11%, from 2015, reflecting higher volume across our treasury management platforms and ongoing success in cross-selling treasury management services to new commercial clients, partially offset by some price adjustments on certain services. We continue to build client relationships, with approximately 75% of our commercial clients using treasury management services at December 31, 2016. Cross-sell and implementation of treasury management services may lag the closing of a credit facility by three to six months on average. In a rising rate environment, growth in treasury management fees may be impacted as increases in the earnings credit rate allows clients to pay for more services with the same balances.

Loan, letter of credit and commitment fees increased $695,000, or 3%, from 2015, driven by a $1.1 million, or 11%, increase in unused commitment fees, partially offset by lower standby letter of credit fees. The majority of our unused commitment fees related to revolving credit facilities, which at December 31, 2016 totaled $11.0 billion, of which $6.1 billion were unused. In comparison, at December 31, 2015, commitments related to revolving credit facilities totaled $9.7 billion, of which $5.2 billion were unused.

42


Syndication fees of $21.0 million for 2016 grew $3.8 million from the prior year. The current year included two transactions which contributed $2.9 million of revenue in aggregate. During 2016, we were the lead or co-lead in 118 syndicated loan transactions, totaling $3.2 billion in commitments, while retaining $1.2 billion in commitments. In 2015, we were the lead or co-lead in 85 syndicated loan transactions, totaling $2.3 billion in commitments, while retaining $1.0 billion in commitments. Syndication fees per transaction typically vary depending on, among other factors, market conditions and the size and structure of the transaction, so the aggregate level of syndication fees earned by us in a given period is not entirely correlated with our volume of syndications and our syndication fees will fluctuate from period to period. While we generally expect increased syndication opportunities as we grow our loan portfolio and client relationships, our volume of syndication transactions depends on a number of factors, including portfolio management decisions, the mix of loans originated, and liquidity and demand by other institutions for syndicated loans. We believe that a number of macroeconomic conditions, such as declining commodity prices, and regulatory developments, such as enhanced regulatory focus on leveraged lending and CRE concentrations, have impacted market demand for syndicated loans, which could reduce our level of syndication fees in future periods.

Deposit services charges and fees and other income declined $2.1 million from 2015. Prior year results included a $4.1 million gain on branch sale in the prior year. Current year results included $2.9 million in gains on sale of several problem loans.

Non-interest Income - 2015 compared to 2014

Non-interest income for 2015 was $130.0 million, increasing $12.4 million, or 11%, compared to 2014, reflecting growth in all categories except syndication fees. Other income for 2015 included a $4.1 million gain on branch sale.

Asset management fee revenue increased $690,000, or 4%, from 2014, reflecting fees from new business added over the past year. We grew AUMA $645.1 million, or 10%, from year end 2014 to year end 2015, primarily attributable to continued client acquisition and cross-selling asset management services to our commercial client base. The largest growth (both from a dollar and percentage perspective) during this period came from corporate and institutional managed accounts, which generate proportionately higher fees than custody assets but lower fees than personal managed accounts.

Income from our mortgage banking business increased $3.8 million, or 37%, from 2014. The increase resulted from a higher volume of loans originated and sold reflecting lower long-term interest rates, favorable conditions in the housing market, and higher spreads for 2015 compared to 2014. During 2015, we sold $470.9 million of mortgage loans in the secondary market, generating gains of $11.6 million, compared to $359.6 million of mortgages loans sold in 2014, generating gains of $10.2 million.

Capital markets products income increased $483,000 from 2014 and included a $373,000 negative CVA compared to a negative CVA of $46,000 for 2014. Exclusive of CVA, capital markets income increased $810,000, or 4%, from 2014, reflecting increased transactions and growth in FX transactions, partially offset by a change in the mix of interest rate contracts to lower yielding products.

Treasury management income increased $3.2 million, or 12%, from 2014, primarily due to higher volume across our treasury management platforms. The increase from 2014 reflected the ongoing success in cross-selling treasury management services to new commercial clients as we continue to build client relationships.

Loan and credit-related fees increased $1.3 million, or 7%, from 2014, largely due to an increase in unused commitment fees and standby letter of credit fees. The majority of our unused commitment fees related to revolving facilities, which at December 31, 2015 totaled $9.7 billion, of which $5.2 billion were unused. In comparison, at December 31, 2014, commitments related to revolving facilities totaled $8.8 billion, of which $4.8 billion were unused. The growth in commitments related to revolving facilities over the year reflected new client relationships added since December 31, 2014.

Syndication fees were $17.2 million for 2015, decreasing $2.3 million from 2014. Syndication fees tend to fluctuate period to period depending on market conditions, loan origination trends, and portfolio management decisions.


43

Non-interest Expense

Table 4
Non-Interest Expense Analysis
(Dollars in thousands)
 
Year Ended December 31,
 
% Change
 
2016
 
2015
 
2014
 
2016-2015
 
2015-2014
Compensation expense:
 
 
 
 
 
 
 
 
 
Salaries and wages
$
121,195

 
$
110,719

 
$
103,343

 
9

 
7

Share-based costs
20,737

 
18,839

 
15,567

 
10

 
21

Incentive compensation and commissions
61,937

 
52,137

 
43,084

 
19

 
21

Payroll taxes, insurance and retirement costs
23,908

 
23,324

 
20,198

 
3

 
15

Total compensation expense
227,777

 
205,019

 
182,192

 
11

 
13

Net occupancy and equipment expense
29,162

 
28,214

 
27,417

 
3

 
3

Technology and related costs
23,722

 
18,761

 
17,122

 
26

 
10

Marketing
17,496

 
16,122

 
13,441

 
9

 
20

Professional services
18,884

 
11,320

 
11,761

 
67

 
-4

Outsourced servicing costs
6,201

 
7,494

 
6,864

 
-17

 
9

Net foreclosed property expense
3,524

 
4,210

 
8,681

 
-16

 
-52

Postage, telephone, and delivery
3,426

 
3,582

 
3,400

 
-4

 
5

Insurance
15,796

 
13,972

 
12,451

 
13

 
12

Loan and collection:
 
 
 
 
 
 
 
 
 
Loan origination and servicing expense
5,960

 
6,200

 
5,323

 
-4

 
16

Loan remediation expense
2,172

 
2,356

 
1,442

 
-8

 
63

Total loan and collection expense
8,132

 
8,556

 
6,765

 
-5

 
26

Other operating expense:
 
 
 
 
 
 
 
 
 
Supplies and printing
568

 
638

 
688

 
-11

 
-7

Subscriptions and dues
2,111

 
1,363

 
1,238

 
55

 
10

Education and training
1,092

 
1,200

 
1,087

 
-9

 
10

Internal travel and entertainment
2,780

 
2,021

 
1,932

 
38

 
5

Investment manager expense
2,216

 
2,561

 
2,743

 
-13

 
-7

Bank charges
1,282

 
1,283

 
1,070

 
—

 
20

Intangible amortization
2,161

 
2,455

 
3,007

 
-12

 
-18

Provision (release) for unfunded commitments
5,381

 
(519
)
 
3,152

 
n/m

 
-116

Other expenses
762

 
4,985

 
7,065

 
-85

 
-29

Total other operating expenses
18,353

 
15,987

 
21,982

 
15

 
-27

Total non-interest expense
$
372,473

 
$
333,237

 
$
312,076

 
12

 
7

Full-time equivalent (“FTE”) employees at year end
1,301

 
1,219

 
1,168

 
7

 
4

Operating efficiency ratios:
 
 
 
 
 
 
 
 
 
Non-interest expense to average assets
2.03
%
 
2.03
%
 
2.13
%
 
 
 
 
Net overhead ratio (1)
1.22
%
 
1.24
%
 
1.33
%
 
 
 
 
Efficiency ratio (2)
50.67
%
 
51.37
%
 
54.22
%
 
 
 
 
 
Note:
Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
n/m
Not meaningful
(1) 
Computed as non-interest expense, less non-interest income, 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%. Refer to Table 25, “Non-U.S. GAAP Financial Measures,” for a reconciliation of the effect of the tax-equivalent adjustment.

44

Non-interest Expense - 2016 compared to 2015

Non-interest expense increased $39.2 million, or 12%, compared to the prior year, primarily reflecting higher compensation, professional services, and technology expenses. Included in non-interest expense for 2016 were $6.7 million of transaction-related expenses associated with the pending merger with CIBC that were largely reflected in professional services expense.

Compensation expense, which is comprised of salaries and wages, share-based costs, incentive compensation, and payroll taxes, insurance, and retirement costs, increased $22.8 million, or 11%, from 2015. Salary and wages were up $10.5 million, or 9%, compared to the prior year, primarily reflecting a larger FTE base compared to December 31, 2015 and annual compensation and promotion adjustments. Share-based costs increased $1.9 million, or 10%, largely attributable to a higher volume of awards granted during first quarter 2016 that met a shortened expense recognition period related to certain retirement provisions and a higher level of annual awards granted. Incentive compensation and commissions increased $9.8 million, or 19%, from 2015, reflecting improved performance resulting in higher incentive compensation and commissions on a higher FTE base. Consistent with prior years, due in part to the start of a new year for payroll tax purposes and the payroll taxes associated with incentive compensation payments (most of which are paid in the first quarter of each year), we expect first quarter 2017 compensation expense to be seasonally higher compared to fourth quarter 2016. First quarter 2017 compensation expense will be impacted by the timing of expense recognition for the equity awards we granted in February 2017. The terms of these awards differed from prior year annual equity grants as contemplated by the terms of the CIBC merger agreement, which will result in a greater portion of the share-based expense being recognized at the time of grant rather than over the vesting period. We estimate that first quarter 2017 share-based costs will increase by approximately $8.5 million to $15.0 million, compared to first quarter 2016, with a most of this increase attributable to the changed award terms.

Technology and related costs increased $5.0 million, or 26%, from 2015 and included higher costs to third party service providers and amortization costs related to several larger projects as we continue investing in our business.

Marketing expense increased $1.4 million, or 9%, from the prior year, reflecting higher costs associated with sponsorships, contributions, and client development activities.

Professional services expense, which includes fees paid for legal services in connection with corporate activities, accounting, and consulting services, increased $7.6 million from 2015, primarily related to the transaction-related expenses mentioned above.

Insurance costs increased $1.8 million, or 13%, from 2015, primarily related to larger FDIC deposit insurance premiums in 2016, reflecting overall asset growth and, to a lesser extent, an increase in the rate paid due to changes in the overall composition of our balance sheet.

Other operating expenses increased $2.4 million, or 15%, from the prior year period. Other expenses include bank charges, costs associated with the CDARS® deposit product offering, intangible asset amortization, education-related costs, subscriptions, provision for unfunded commitments, and miscellaneous losses and expenses. The increase was attributable to higher subscriptions and dues, internal travel costs in connection with the pending CIBC merger and included a $5.4 million provision for unfunded commitments in 2016, compared to $519,000 release of reserve for unfunded commitments in 2015. These increases were partially offset by positive market value adjustments and gain on sale on various non-marketable investments, including partnership interests in various CRA investments and non-mortgage loans held-for-sale.

Our efficiency ratio was 50.7% for 2016, improving from 51.4% for 2015, as top-line revenue growth out-paced increases in operating costs during the current year. We expect some contribution to revenue in 2017 from the early January 2017 repricing of a larger portion of our floating-rate loan portfolio in response to interest rate moves during December 2016, which would positively impact our efficiency ratio.

Non-interest Expense - 2015 compared to 2014

Non-interest expense increased by $21.2 million, or 7%, from 2014, reflecting higher compensation, marketing, and insurance expenses. This was partially offset by a decrease in net foreclosed property expense, a release in the provision for unfunded commitments, and lower operating expenses.

Compensation expense increased by $22.8 million, or 13%, from 2014, due to increased incentive compensation accruals based on improved performance, additions to staff to support our growing business, and annual compensation adjustments. Salary and wages were up $7.4 million, or 7%, from the prior year primarily due to additional FTEs, as well as annual compensation adjustments. Share-based costs increased $3.3 million, or 21%, largely attributable to changes made to the retirement provisions of certain performance awards and a higher level of awards granted in 2015. Incentive compensation and commissions increased by $9.1

45

million, or 21%, compared to 2014, due to improved performance resulting in higher mortgage banking commissions and incentive compensation plan expense. Payroll taxes and insurance costs were up $3.1 million, or 15%, from the prior year reflecting a higher compensation base and greater healthcare insurance costs in 2015 as compared to 2014.

Marketing expense increased $2.7 million, or 20%, from 2014, as a result of our continued client development activities and increased advertising and branding investments.

Net foreclosed property expense, which includes write-downs on foreclosed properties, gains and losses on sales of foreclosed properties, taxes, and other expenses associated with the maintenance of foreclosed real estate (“OREO”), declined $4.5 million, or 52%, from 2014. OREO writedowns totaled $2.4 million in 2015, declining $4.1 million from 2014. In addition, property ownership costs, such as property management and real estate taxes, were down $1.3 million from 2014 as the population of OREO declined from $17.4 million at December 31, 2014 to $7.3 million at December 31, 2015.

Insurance expense increased $1.5 million, or 12%, from 2014, primarily due to higher FDIC deposit insurance in 2015 related to overall asset growth, and to a lesser extent, an increase in the rate paid as a result of changes in the overall composition of our balance sheet.

Loan and collection expense, which consists of certain non-reimbursable costs associated with loan origination and servicing and loan remediation costs for problem and nonperforming loans, increased $1.8 million, or 26%, from 2014. The increase was primarily due to increased mortgage origination costs related to a higher volume of mortgage loans sold compared to the prior year, along with problem loan resolutions on two specific credits during 2015.

Other operating expenses decreased $6.0 million, or 27%, from 2014, primarily reflecting a $522,000 release of reserves for unfunded commitments during 2015 related to specific credits previously reserved, compared to a $3.2 million provision recorded in 2014 largely related to $1.1 billion growth in commitments. Also included in other expenses during 2014 was $1.6 million of office relocation costs related to the Kansas City office space.

Income Taxes

Our provision for income taxes includes both federal and state income tax expense. An analysis of the provision for income taxes and the effective income tax rates for the periods 2016 through 2014 are presented in the following table.

Table 5
Income Tax Provision Analysis
(Dollars in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Income before income tax provision
$
324,001

 
$
296,400

 
$
248,207

Income tax expense
$
115,644

 
$
111,089

 
$
95,128

Effective income tax rate
35.7
%
 
37.5
%
 
38.3
%

Generally, our effective income tax rate varies from the statutory federal income tax rate of 35% principally due to state income taxes, the effects of tax-exempt earnings from municipal securities and bank-owned life insurance, the effects of equity compensation, business expenses and tax credits.

The decline in our effective tax rate in 2016 compared to 2015 is attributable to larger levels of tax credits in 2016 and the $3.7 million impact of the early adoption of tax accounting changes for share-based payments in 2016.

Net deferred tax assets are included in other assets in the accompanying consolidated statements of financial condition and totaled $128.8 million at December 31, 2016, consisting of gross deferred tax assets of $138.5 million offset by gross deferred tax liabilities of $9.7 million.

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 as of December 31, 2016. This conclusion was based on the Company’s recent earnings history, on both a book and tax basis, and our outlook for earnings and taxable income in future periods. Proposed legislation that would reduce the U.S. statutory corporate income tax rate would likely result in a reduction in the carrying value of our deferred tax assets, the

46

significance of which would be dependent on the degree of reduction in the tax rate. The charge to earnings would be recorded in the period of enactment. However, we would benefit from increased earnings in periods where the lower tax rate is applied to pre-tax profits.

Taxable income in prior years and reversing deferred taxable temporary differences provide sources from which deferred tax assets may be absorbed. Additionally, we have relied on our expectation of generating pre-tax earnings in future periods, which should give rise to taxable income levels, exclusive of reversing temporary differences, that more likely than not will be sufficient to absorb the deferred tax assets.

Operating Segments Results

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

Banking

The Banking operating segment is comprised of commercial and personal banking services. 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.

Our Banking segment is the Company’s most significant segment, representing 89% of our consolidated total assets and generating nearly all of our net income. The profitability of our Banking segment is dependent on net interest income, provision for loan and covered loan losses, non-interest income (exclusive of asset management fees), and non-interest expense. The net income for the Banking segment for the year ended December 31, 2016 was $228.9 million, a $26.0 million increase from net income of $202.9 million for the year ended December 31, 2015. The increase in net income for the Banking segment was primarily due to a $68.5 million increase in net interest income resulting from 13% loan growth during the year. Non-interest expenses increased $32.0 million due primarily to an increase in salaries and incentive compensation primarily driven by new hires, salary increases, and higher incentive compensation tied to improved performance. For the year ended December 31, 2015, net income for the Banking segment increased $27.4 million from the year ended December 31, 2014, and was primarily due to a $51.4 million increase in net interest income driven by 12% loan growth during 2014 and lower interest expense attributable to the $75.0 million partial redemption of our 10% Debentures in fourth quarter 2014.

Total loans for the Banking segment increased to $15.1 billion at December 31, 2016, from $13.3 billion at December 31, 2015. Total deposits increased to $16.1 billion at December 31, 2016 from $14.4 billion at December 31, 2015.

Asset Management

The Asset Management segment includes certain activities of our Private Wealth group, including investment management, personal trust and estate administration, custodial and escrow services, investment management services for 401(k) plans, and brokerage services. The private banking activities of our Private Wealth group are included with the Banking segment.

Net income from Asset Management increased to $4.2 million for 2016, compared to $3.2 million for 2015 and $2.5 million for 2014. The current year increase was attributable to a higher level of fee income from growth in AUMA, compared to the prior years. AUMA grew to $9.7 billion at December 31, 2016, from $7.3 billion at December 31, 2015 and $6.6 billion at December 31, 2014, attributable to growth in both managed and custody assets from new client acquisition, including sizeable corporate trust and corporate retirement accounts added during 2016.

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 are 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 certain compensation expense and professional fees allocated to the Holding Company. The Holding Company Activities segment reported a net loss of $24.7 million for the year ended December 31, 2016, compared to a net loss of $20.8 million for the same period in 2015 and a net loss of $24.9 million for 2014. The increase in net loss in 2016 was due to higher non-interest expense in 2016 as a result of $6.7 million in transaction-related expenses. The Holding Company had $52.8 million in cash at December 31, 2016 compared to $61.5 million at December 31, 2015.


47

Additional information about our operating segments is also discussed in Note 21 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

FINANCIAL CONDITION

Total assets were $20.1 billion at December 31, 2016, a 16% increase from total assets of $17.3 billion at December 31, 2015. Total loans increased to $15.1 billion at year end 2016 from $13.3 billion at year end 2015, representing a 13% increase. Our total deposits increased to $16.1 billion at year end 2016 from $14.3 billion at year end 2015, representing a 12% increase. Total stockholders’ equity increased 13% from $1.7 billion at December 31, 2015 to $1.9 billion at December 31, 2016.

Investment Portfolio Management

We manage our investment securities portfolio to maximize the return on invested funds within acceptable risk guidelines, meet pledging and liquidity requirements, and adjust balance sheet interest rate sensitivity in an effort to protect 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 securities and, to a lesser extent, state and municipal securities.

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 aggregate 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 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 for which we have the ability and intent to hold them until maturity and are accounted for using historical cost, as adjusted for amortization of premiums and accretion of discounts.


48

Table 6
Investment Securities Portfolio Valuation Summary
(Dollars in thousands)
 
 
As of December 31, 2016
 
As of December 31, 2015
 
As of December 31, 2014
 
Fair
Value
 
Amortized
Cost
 
% of
Total
 
Fair
Value
 
Amortized
Cost
 
% of
Total
 
Fair
Value
 
Amortized
Cost
 
% of
Total
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
542,295

 
$
548,894

 
15

 
$
321,651

 
$
322,922

 
10

 
$
268,265

 
$
269,697

 
10
U.S. Agency
45,940

 
46,043

 
1

 
46,098

 
46,504

 
2

 
46,258

 
46,959

 
2
Collateralized mortgage obligations
75,345

 
73,228

 
2

 
99,972

 
97,260

 
3

 
136,933

 
132,633

 
5
Residential mortgage-backed securities
886,550

 
884,176

 
24

 
829,855

 
817,006

 
27

 
846,078

 
822,746

 
29
State and municipal securities
463,395

 
466,651

 
12

 
467,790

 
458,402

 
15

 
347,310

 
340,810

 
13
Foreign sovereign debt
—

 
—

 
—

 
—

 
—

 
—

 
500

 
500

 
*
Total available-for-sale
2,013,525

 
2,018,992

 
54

 
1,765,366

 
1,742,094

 
57

 
1,645,344

 
1,613,345

 
59
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
39,273

 
40,568

 
1

 
48,979

 
50,708

 
2

 
57,943

 
59,960

 
2
Residential mortgage-backed securities
1,360,921

 
1,378,610

 
37

 
1,069,572

 
1,069,746

 
34

 
892,162

 
885,235

 
32
Commercial mortgage-backed securities
310,161

 
314,622

 
8

 
228,063

 
229,722

 
7

 
181,437

 
183,021

 
7
State and municipal securities
204

 
204

 
*

 
254

 
254

 
*

 
1,073

 
1,069

 
*
Foreign sovereign debt
500

 
500

 
*

 
500

 
500

 
*

 
—

 
—

 
—
Other securities
3,711

 
3,619

 
*

 
3,873

 
4,353

 
*

 
—

 
—

 
—
Total held-to-maturity
1,714,770

 
1,738,123

 
46

 
1,351,241

 
1,355,283

 
43

 
1,132,615

 
1,129,285

 
41
Total securities
$
3,728,295

 
$
3,757,115

 
100

 
$
3,116,607

 
$
3,097,377

 
100

 
$
2,777,959

 
$
2,742,630

 
100
*    Less than 1%

As of December 31, 2016, our securities portfolio totaled $3.7 billion, increasing $611.7 million, or 20%, compared to December 31, 2015. During 2016, purchases of securities totaled $1.2 billion, with $549.0 million in the available-for-sale portfolio and $615.5 million in the held-to-maturity portfolio. The current year purchases in the investment portfolio primarily represented the reinvestment of proceeds from sales, maturities and paydowns in largely similar agency guaranteed residential and commercial mortgage-backed securities and state and municipal securities, as well as purchases of U.S. Treasury securities.

In conjunction with ongoing portfolio management and rebalancing activities, during 2016, we sold $45.4 million in state and municipal securities, resulting in a net securities gain of $1.1 million.

Investments in collateralized mortgage obligations and residential and commercial mortgage-backed securities comprise 72% of the total portfolio at December 31, 2016. All of the mortgage securities are backed by U.S. Government agencies or issued by U.S. Government-sponsored enterprises. All residential mortgage securities are comprised of fixed-rate, fully-amortizing collateral with final maturities of 30 years or less.

Investments in debt instruments of states and local municipalities comprised 12% of the total portfolio at December 31, 2016. This type of security has historically experienced very low default rates and provided a predictable cash flow because it generally is not subject to significant prepayment. For a portion of our state and local municipality debt instruments, insurance companies and state programs provide credit enhancement to improve the credit rating and liquidity of the issuance. Management considers underlying municipality credit strength and any credit enhancement when evaluating a purchase or sale decision.

We do not hold direct exposure to the obligations of the State of Illinois. We hold some bonds from municipalities in Illinois, but the finances of these municipalities are not primarily dependent on the finances of the State of Illinois.

At December 31, 2016, our reported equity reflected unrealized net securities losses on available-for-sale securities, net of tax, of $3.5 million, a decrease of $17.5 million from the unrealized net securities gains of $14.0 million at December 31, 2015, primarily due to increases in interest rates and the corresponding decrease in the market value of securities and unrealized net securities

49

gains. We continue to add, as needed, to the held-to-maturity portfolio to mitigate the potential future market volatility of adding bonds to the available-for-sale portfolio in a low interest rate environment.

During the year ended December 31, 2015, we identified three municipal debt securities from the same issuer totaling $1.1 million, which had credit rating downgrades during the period. We determined that the difference between amortized cost and fair value was other-than-temporary and, accordingly, recognized the $466,000 difference as a component of net securities gains in the consolidated statements of income. The securities were sold in January 2016 with no further losses recognized.

The following table summarizes activity in the Company’s investment securities portfolio during 2016. There were no transfers of securities between investment categories during the year.

Table 7
Investment Portfolio Activity
(Dollars in thousands)
 
 
December 31, 2016
 
 
Available-for-Sale
 
Held-to-Maturity
 
Balance at beginning of year
$
1,765,366

 
$
1,355,283

 
Additions:
 
 
 
 
Purchases
549,001

 
615,464

 
Reductions:
 
 
 
 
Sale proceeds
(45,446
)
 
—

 
Net gain on sale
1,111

 
—

 
Principal maturities, prepayments and calls, net of gains
(214,609
)
 
(221,687
)
 
Amortization of premiums and accretion of discounts
(13,159
)
 
(10,937
)
 
Total reductions
(272,103
)
 
(232,624
)
 
Decrease in market value
(28,739
)
 
—

(1) 
Balance at end of year
$
2,013,525

 
$
1,738,123

 
(1) 
The held-to-maturity portfolio is recorded at cost, with no adjustment for the $4.0 million unrealized loss in the portfolio at the beginning of 2016 or the decrease in market value of $19.3 million for the year ended December 31, 2016.


50

The following table presents the maturities of the different types of investment securities that we owned at December 31, 2016 and the corresponding interest rates.
Table 8
Maturity Distribution and Portfolio Yields
(Dollars in thousands)

 
As of December 31, 2016
 
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
$
50,207

 
0.87
%
 
$
296,527

 
1.24
%
 
$
202,160

 
1.56
%
 
$
—

 
—
%
U.S. Agency securities
—

 
—
%
 
46,043

 
1.30
%
 
—

 
—
%
 
—

 
—
%
Collateralized mortgage obligations (1)
4,157

 
3.65
%
 
69,071

 
3.18
%
 
—

 
—
%
 
—

 
—
%
Residential mortgage-backed securities (1)
1,991

 
4.64
%
 
355,658

 
3.23
%
 
494,448

 
2.29
%
 
32,079

 
2.72
%
State and municipal securities (2)
25,663

 
2.00
%
 
169,093

 
1.98
%
 
268,080

 
2.10
%
 
3,815

 
2.06
%
Total available-for-sale
82,018

 
1.46
%
 
936,392

 
2.28
%
 
964,688

 
2.08
%
 
35,894

 
2.65
%
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations (1)
—

 
—
%
 
40,568

 
1.40
%
 
—

 
—
%
 
—

 
—
%
Residential mortgage-backed securities (1)
—

 
—
%
 
481,774

 
2.28
%
 
390,387

 
2.52
%
 
506,449

 
2.84
%
Commercial mortgage-backed securities (1)
3,603

 
1.29
%
 
140,979

 
1.91
%
 
170,040

 
2.37
%
 
—

 
—
%
State and municipal securities (2)
204

 
3.49
%
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
Foreign sovereign debt
—

 
—
%
 
500

 
1.76
%
 
—

 
—
%
 
—

 
—
%
Other securities
—

 
—
%
 
3,619

 
8.57
%
 
—

 
—
%
 
—

 
—
%
Total held-to-maturity
3,807

 
1.41
%
 
667,440

 
2.18
%
 
560,427

 
2.47
%
 
506,449

 
2.84
%
Total securities
$
85,825

 
1.45
%
 
$
1,603,832

 
2.24
%
 
$
1,525,115

 
2.23
%
 
$
542,343

 
2.83
%
(1) 
The repricing distributions and yields to maturity of collateralized mortgage obligations and mortgage-backed securities are based on the 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 securities 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)

Our principal source of revenue arises from our lending activities, primarily composed of interest income and, to a lesser extent, loan origination and commitment fees, net of related costs. The accounting policies underlying the recording of loans in the consolidated statements of financial condition and the recognition and/or deferral of interest income and fees, net of costs, arising from lending activities are included in Note 1 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

The following discussion of our loan portfolio and credit quality excludes covered assets. Covered assets represent assets acquired through a FDIC-assisted acquisition 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” below in this “Management’s Discussion and Analysis”.


51

Portfolio Composition

Table 9
Loan Portfolio
(Dollars in thousands)
 
 
December 31,
 
2016
 
% of
Total
 
 
2015
 
% of
Total
 
 
2014
 
% of
Total
 
 
2013
 
% of
Total
 
 
2012
 
% of
Total
Commercial
$
7,506,977

 
50
 
 
$
6,747,389

 
51
 
 
$
5,996,070

 
50
 
 
$
5,360,773

 
51
 
 
$
4,843,227

 
48
Commercial - owner-occupied real estate
2,142,068

 
14
 
 
1,888,238

 
14
 
 
1,892,564

 
16
 
 
1,695,479

 
16
 
 
1,608,091

 
16
Total commercial
9,649,045

 
64
 
 
8,635,627

 
65
 
 
7,888,634

 
66
 
 
7,056,252

 
67
 
 
6,451,318

 
64
Commercial real estate
3,127,373

 
21
 
 
2,629,873

 
20
 
 
2,323,616

 
20
 
 
2,062,889

 
19
 
 
2,177,529

 
21
Commercial real estate - multi-family
993,352

 
6
 
 
722,637

 
5
 
 
593,103

 
5
 
 
513,194

 
5
 
 
543,622

 
5
Total commercial real estate
4,120,725

 
27
 
 
3,352,510

 
25
 
 
2,916,719

 
25
 
 
2,576,083

 
24
 
 
2,721,151

 
26
Construction
417,955

 
3
 
 
522,263

 
4
 
 
381,102

 
3
 
 
293,387

 
3
 
 
190,496

 
2
Total commercial real estate and construction
4,538,680

 
30
 
 
3,874,773

 
29
 
 
3,297,821

 
28
 
 
2,869,470

 
27
 
 
2,911,647

 
28
Residential real estate
581,757

 
4
 
 
461,412

 
4
 
 
361,565

 
3
 
 
341,868

 
3
 
 
373,580

 
4
Home equity
119,049

 
1
 
 
129,317

 
1
 
 
142,177

 
1
 
 
149,732

 
1
 
 
167,760

 
2
Personal
167,710

 
1
 
 
165,346

 
1
 
 
202,022

 
2
 
 
226,699

 
2
 
 
235,677

 
2
Total loans
$
15,056,241

 
100
 
 
$
13,266,475

 
100
 
 
$
11,892,219

 
100
 
 
$
10,644,021

 
100
 
 
$
10,139,982

 
100
Growth vs. prior year–end
13
%
 
 
 
 
12
%
 
 
 
 
12
%
 
 
 
 
5
%
 
 
 
 
13
%
 
 

Total loans increased $1.8 billion during 2016 to $15.1 billion at December 31, 2016, compared to $13.3 billion at December 31, 2015, reflecting growth primarily in commercial and CRE loans. During the year ended December 31, 2016, new loans to new clients totaled $1.9 billion, and growth in existing clients, net of paydowns, totaled $1.7 billion. Payoffs were $1.8 billion for the year ended December 31, 2016. Our five-quarter trailing average loan growth was $395.4 million at December 31, 2016, increasing $51.6 million compared to $343.8 million a year ago. Revolving line usage on the overall loan portfolio decreased to 44% at December 31, 2016, from 47% at December 31, 2015, primarily reflecting the addition of new unfunded commitments.

Our loan growth was primarily driven by growth in the commercial and CRE loan portfolios, which increased $1.0 billion and $768.2 million, respectively, from December 31, 2015. Within the commercial loan portfolio, we saw growth in multiple industry segments from the prior year end, including finance and insurance, which increased $336.1 million, and healthcare, which increased $208.3 million. We also saw growth across multiple asset classes in the CRE portfolio during 2016. Multi-family is the largest asset class in the CRE portfolio, representing 24% of the total CRE portfolio at December 31, 2016, compared to 22% at December 31, 2015.

Heightened competition from both bank and non-bank lenders has affected, and continues to affect, borrowers’ expectations regarding both pricing and loan structure, which may impact our growth rate due to increasing availability in the market of financing alternatives offering terms outside our pricing and risk tolerances. Our primary strategy is focused on developing new relationships that generate opportunities to provide comprehensive banking services to our clients and, accordingly, we seek to maintain a disciplined approach when pricing and structuring new credit opportunities.
We generally earn higher yields on our commercial and industrial portfolio particularly related to our specialized lending products, such as healthcare and security alarm financing, than other segments of our loan portfolio. We also have greater potential to cross-sell other products and services, such as treasury management services, to our commercial and industrial lending clients.

In the normal course of our business, we participate in loan transactions that involve a number of banks in an effort to maintain and build client relationships while managing portfolio risk, with a view to cross-selling products and originating loans for the borrowers in the future. Although we often strive to lead or co-lead the arrangement, we also participate in transactions led by other banks when we have a relationship with, or seek to develop a relationship with, the borrower. Loan syndications assist us with decreasing credit exposure linked to individual client relationships or loan concentrations by industry, type or size. Of our $15.1 billion in total loans at December 31, 2016, we were party to $5.5 billion of loans with other financial institutions, consisting of $2.5 billion in retained balances in syndicated loans that were led or co-led by us and $3.0 billion for which we were a non-

52

lead participant in the syndicated loan. Within this $5.5 billion portfolio, $3.3 billion of loans were shared national credits (“SNCs”), of which we were the lead or co-lead in $1.1 billion and the non-lead participant in $2.2 billion. SNCs are defined as loan commitments of at least $20 million that are shared by three or more regulatory depository institutions. Of the $1.9 billion of new loans to new clients during 2016, approximately $419.3 million, or 22%, related to SNCs. To the extent financing opportunities we pursue exceed our risk appetite for larger credit exposures and we are not able to syndicate the loan transactions, our loan growth may be impacted.

The following table summarizes the composition of our commercial loan portfolio at December 31, 2016 and 2015 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)
 
 
December 31, 2016
 
December 31, 2015
 
Amount
 
% of Total
 
Amount
 
% of Total
Healthcare
$
2,016,041

 
21
 
$
1,807,764

 
21
Manufacturing
1,843,901

 
19
 
1,810,085

 
21
Finance and insurance
1,669,453

 
17
 
1,333,363

 
15
Wholesale trade
860,657

 
9
 
768,571

 
9
Professional, scientific, and technical services
617,264

 
6
 
574,278

 
7
Real estate, rental and leasing
583,701

 
6
 
542,437

 
6
Administrative and support and waste management and remediation services
537,491

 
6
 
481,827

 
5
Architecture, engineering and construction
298,191

 
3
 
252,351

 
3
Telecommunication and publishing
250,941

 
3
 
203,994

 
2
Retail trade
231,739

 
2
 
228,935

 
3
All other (1)
739,666

 
8
 
632,022

 
8
Total commercial (2)
$
9,649,045

 
100
 
$
8,635,627

 
100
(1) 
All other consists of numerous smaller balances across a variety of industries with no category greater than 2% of total loans.
(2) 
Includes owner-occupied commercial real estate of $2.1 billion at December 31, 2016 and $1.9 billion at 2015.

Our healthcare portfolio within our commercial portfolio totaled $2.0 billion at December 31, 2016, compared to $1.8 billion at December 31, 2015. We have a specialized niche in the skilled nursing, assisted living, 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 December 31, 2016, 21% of our commercial loan portfolio and 13% of our 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. Accordingly, our clients and their ability to service this 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 government entities are taking longer to reimburse providers. For example, in the State of Illinois, the Medicaid reimbursement rate was reduced and the budget impasse, which has resulted in the state operating without a budget since June 30, 2015, has contributed to reduced Medicaid payments to healthcare providers. Although our healthcare commercial loan portfolio is well diversified across 28 states, loans to borrowers in the State of Illinois represented our highest geographic concentration of healthcare loans at 23% of the healthcare commercial loan portfolio, or $454.7 million, as of December 31, 2016. The challenged financial condition of the State of Illinois has had some adverse effects on the cash flow position of some of our Illinois-based healthcare borrowers. Despite this impact on client cash flows, to date, the healthcare loan portfolio has experienced minimal defaults and losses. We are actively monitoring the Illinois budget situation and its potential impact on our borrowers to manage the risks presented by the state’s budget problems and overall challenged financial condition. In addition, across the broader healthcare industry, structural changes to government reimbursements may negatively impact performance for managed care facilities as borrowers adapt to the changes, particularly higher cost operators with thinner margins.


53

Our manufacturing portfolio, representing 19% of our commercial lending portfolio and 21% of the total portfolio at December 31, 2016, is well diversified among sub-industry and product types. The manufacturing industry classification is a key component of our core business. During the second half of 2015 and into 2016, the U.S. manufacturing sector experienced a significant slowdown, as evidenced by declines or slowing rates of growth in a number of key indicators, due in part to the economic headwinds of lower commodity prices (including oil and gas prices) and a strong U.S. dollar, with particular stress faced by durable goods manufacturing. Although the U.S. manufacturing sector began to rebound toward the end of 2016, the sector’s performance may continue to experience volatility due to the impact of commodity prices, currency exchange rates, possible U.S. corporate tax reform, U.S. political developments and broader geopolitical developments on this sector. Any stress or volatility experienced by the U.S. manufacturing sector specifically could adversely impact our existing loan portfolio and/or our future loan growth rate.

The third largest segment of our commercial loan portfolio is the finance and insurance portfolio, which increased $336.1 million, since December 31, 2015 and now represents 17% of our commercial lending portfolio at December 31, 2016 compared to 15% at December 31, 2015. Contributing to the increase year-over-year was growth in specialty finance loans, which totaled $496.1 million as of December 31, 2016, up from $388.2 million at December 31, 2015. This type of lending represents loans to nonbank specialty finance lenders that provide various types of financing to their customers, such as consumer financing, auto financing, equipment financing or other types of asset-based lending. The growth in this portfolio is a result of pursuing new opportunities to add specialized industry knowledge amongst our client relationship managers, with an expanded team in 2015 and a greater presence in the market. At December 31, 2016, amounts outstanding under bridge lines to private equity funds, which provide liquidity as a bridge to the next capital call from their investors, totaled $245.9 million, compared to $239.9 million at December 31, 2015. The draw repayment terms of such loans are generally between 90 and 120 days and, given their purpose, these draws generally remain outstanding for a short period of time. Amounts outstanding under these lines generally will fluctuate from quarter to quarter given their transactional nature.

The following table summarizes our CRE and construction loan portfolios by collateral type at December 31, 2016 and 2015.

Table 11
Commercial Real Estate and Construction Loan Portfolios by Collateral Type
(Dollars in thousands)
 
 
December 31, 2016
 
December 31, 2015
 
Amount
 
% of Total
 
Amount
 
% of Total
Commercial Real Estate
 
 
 
 
 
 
 
Multi-family
$
993,352

 
24
 
$
722,637

 
22
Retail
822,811

 
20
 
763,179

 
23
Office
716,775

 
17
 
572,711

 
17
Health care
371,961

 
9
 
335,918

 
10
Industrial/warehouse
493,257

 
12
 
319,958

 
9
Land
232,756

 
6
 
247,190

 
7
Residential 1-4 family
56,730

 
1
 
86,214

 
3
Mixed use/other
433,083

 
11
 
304,703

 
9
Total commercial real estate
$
4,120,725

 
100
 
$
3,352,510

 
100
Construction
 
 
 
 
 
 
 
Multi-family
$
121,983

 
29
 
$
130,020

 
25
Health care
22,027

 
5
 
62,460

 
12
Retail
61,791

 
15
 
107,327

 
21
Office
18,800

 
4
 
84,459

 
16
Condominiums
36,846

 
9
 
37,451

 
7
Industrial/warehouse
77,079

 
18
 
46,530

 
9
Residential 1-4 family
26,013

 
6
 
21,849

 
4
Mixed use/other
53,416

 
14
 
32,167

 
6
Total construction
$
417,955

 
100
 
$
522,263

 
100


54

Of the combined CRE and construction portfolios, the three largest categories at December 31, 2016 were multi-family, retail and office, which represented 25%, 19% and 16% of the combined portfolios, respectively. Generally, we are a short-to-intermediate term real estate lender, and our CRE and construction portfolio strategies focus on core real estate classes in the markets in which we operate and established sponsors and developers with which we have prior experience, other banking relationships or the opportunity to offer comprehensive banking relationships. The multi-family asset type is diversified with a combination of stabilization of prior construction projects, existing property improvements, and stable assets with strong recurring cash flows. Payoffs during the year ended December 31, 2016 included property sales and refinancing into the long-term market.

Portfolio Risk Management

In conjunction with our commercial middle market focus, our lending activities sometimes involve larger credit relationships. Due to the larger size of these loans, the unexpected occurrence of an event or development with respect to one or more of these loans that adversely impacts the value of collateral securing the loan, the success of a workout strategy, or our ability to return the loan to performing status could materially and adversely affect our results of operations and financial condition.

The following table summarizes our credit relationships with commitments greater than $25 million as of December 31, 2016 and December 31, 2015:

Table 12
Client Relationships with Commitments Greater Than $25 Million
(Dollars in thousands)

 
December 31,
 
2016
 
2015
Commitments greater than $25 million
 
 
 
Number of client relationships
182

 
149

Percentage that are commercial and industrial businesses
84
%
 
88
%
Aggregate amount of commitments
$
6,153,929

 
$
4,976,666

Funded loan balances
$
3,620,321

 
$
2,841,801

Funded loan balances as a percent of total loan portfolio
24
%
 
21
%

As part of the risk-based deposit insurance assessment framework, the FDIC has established a regulatory classification of “higher-risk assets,” which include higher-risk commercial and industrial loans (funded and unfunded), construction and development loans (funded and unfunded), non-traditional mortgages, and higher-risk consumer loans. As part of our overall portfolio risk management, we have developed a plan to manage our level of higher-risk assets relative to our capital position and within our overall risk appetite and generally have focused in recent periods on being selective in originating loans that are classified as higher-risk assets. The following table summarizes our higher-risk assets as of December 31, 2016 and December 31, 2015.

Table 13 (1) 
Higher-Risk Assets
(Amounts in thousands)

 
December 31, 2016
 
December 31, 2015
 
Outstanding

 
Unfunded Commitment
 
Outstanding

 
Unfunded Commitment
Commercial and industrial
$
1,665,123

 
$
611,301

 
$
1,501,418

 
$
484,654

Construction and development
619,201

 
539,166

 
789,637

 
958,829

Non-traditional mortgages
774

 
—

 
959

 
—

Consumer
8,770

 
—

 
10,445

 
—

Total
$
2,293,868

 
$
1,150,467

 
$
2,302,459

 
$
1,443,483

As a percentage of total loans/unfunded commitments
15
%
 
18
%
 
17
%
 
24
%
(1) 
Loan category classification is based on the FDIC’s regulatory definition.


55

Higher-risk commercial and industrial loans include a majority of our total leveraged loan portfolio and are primarily underwritten on the recurring earnings of the borrower, where the ratio of debt-to-earnings is elevated compared to other commercial loans that are not characterized as higher-risk. Our higher-risk commercial and industrial loans are spread across multiple industries, generally command higher loan yields as a premium for underwriting the additional risk attributable to the leveraged position of the underlying borrower, and typically have lower collateral coverage than similar commercial and industrial loans that are not classified by the FDIC as higher-risk assets. Based on our historical experience, the loss factors and the probability of default for loans underwritten with such characteristics have generally been higher than our commercial and industrial loan portfolio as a whole and we take this into account in establishing our allowance for loan losses.

Maturity and Interest Rate Sensitivity of Loan Portfolio

The following table summarizes the maturity distribution of our loan portfolio as of December 31, 2016, by category, as well as the interest rate sensitivity of loans in these categories that have maturities in excess of one year.

Table 14
Maturities and Sensitivities of Loans to Changes in Interest Rates (1) 
(Amounts in thousands)
 
 
As of December 31, 2016
 
Due in         
1 year
or less
 
Due after 1
year through
5 years
 
Due after      
5 years
 
Total
Commercial
$
2,502,644

 
$
6,939,692

 
$
206,709

 
$
9,649,045

Commercial real estate
1,421,364

 
2,350,595

 
348,766

 
4,120,725

Construction
138,782

 
253,127

 
26,046

 
417,955

Residential real estate
8,809

 
160

 
572,788

 
581,757

Home equity
9,184

 
68,274

 
41,591

 
119,049

Personal
123,578

 
43,951

 
181

 
167,710

Total
$
4,204,361

 
$
9,655,799

 
$
1,196,081

 
$
15,056,241

Loans maturing after one year:
 
 
 
 
 
 
 
Predetermined (fixed) interest rates
 
 
$
135,531

 
$
362,842

 
 
Floating interest rates
 
 
9,520,268

 
833,239

 
 
Total
 
 
$
9,655,799

 
$
1,196,081

 
 
(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 $10.4 billion in loans maturing after one year with a floating interest rate, $1.2 billion are subject to interest rate floors, of which $386.9 million have such floors in effect at December 31, 2016. For further analysis and information related to interest rate sensitivity, see Item 7A “Quantitative and Qualitative Disclosures about Market Risk” of this Form 10-K.

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 during 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 remaining principal amount, the loan may become delinquent in connection with its maturity.

Loans considered special mention loans are performing in accordance with the contractual terms, but demonstrate potential weakness that, if left unresolved, may result in deterioration in our 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 loans, 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

56

meet existing repayment terms in future periods. These loans continue to accrue interest, but ultimate collection 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 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 we may sustain some loss if the deficiencies are not resolved. Although potential problem loans require additional attention by management, they may not become nonperforming.

Nonperforming assets include nonperforming loans and OREO that has been acquired primarily through foreclosure proceedings and are awaiting disposition. 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 principal or interest to be in question prior to the loans becoming 90 days past due. Classification of a loan as nonaccrual does not necessarily preclude the ultimate collection of principal and/or interest.

As part of our ongoing risk management practices and in certain circumstances, we may extend or modify the terms of a loan in an attempt to maximize the collection of amounts due when a borrower is experiencing financial difficulties. The modification may consist of reducing the interest rate, extending the maturity date, reducing 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 troubled debt restructurings (“TDRs”) 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 restructured loan 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. Loans classified as accruing TDRs typically do not require a specific reserve charge, which is a key component in keeping a loan on accrual status. 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).


57

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 years.

Table 15
Nonperforming Assets and Restructured and Past Due Loans
(Dollars in thousands)
 
 
 
December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
Nonaccrual loans:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
69,453

 
$
32,794

 
$
31,047

 
$
24,779

 
$
41,913

Commercial real estate
 
6,316

 
8,501

 
19,749

 
46,953

 
68,554

Construction
 
—

 
—

 
—

 
—

 
557

Residential real estate
 
4,591

 
4,762

 
5,274

 
9,976

 
11,224

Personal and home equity
 
3,328

 
7,692

 
11,474

 
12,530

 
16,532

Total nonaccrual loans
 
$
83,688

 
$
53,749

 
$
67,544

 
$
94,238

 
$
138,780

90 days past due loans (still accruing interest)
 
—

 
—

 
—

 
—

 
—

Total nonperforming loans
 
$
83,688

 
$
53,749

 
$
67,544

 
$
94,238

 
$
138,780

OREO
 
10,203

 
7,273

 
17,416

 
28,548

 
81,880

Total nonperforming assets
 
$
93,891

 
$
61,022

 
$
84,960

 
$
122,786

 
$
220,660

Nonaccrual troubled debt restructured loans (included in nonaccrual loans):
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
33,141

 
$
25,034

 
$
20,113

 
$
6,188

 
$
25,200

Commercial real estate
 
5,857

 
7,619

 
8,005

 
19,309

 
29,426

Residential real estate
 
1,534

 
1,341

 
1,881

 
2,239

 
2,867

Personal and home equity
 
3,081

 
5,177

 
6,299

 
4,446

 
7,299

Total nonaccrual troubled debt restructured loans
 
$
43,613

 
$
39,171

 
$
36,298

 
$
32,182

 
$
64,792

Restructured loans accruing interest:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
63,711

 
$
14,526

 
$
21,124

 
$
17,635

 
$
44,267

Commercial real estate
 
—

 
—

 
199

 
950

 
14,758

Residential real estate
 
—

 
—

 
—

 
—

 
465

Personal and home equity
 
2,291

 
2,020

 
1,422

 
1,591

 
1,490

Total restructured loans accruing interest
 
$
66,002

 
$
16,546

 
$
22,745

 
$
20,176

 
$
60,980

Special mention loans
 
$
179,611

 
$
120,028

 
$
100,989

 
$
71,257

 
$
96,794

Potential problem loans
 
$
123,345

 
$
132,398

 
$
87,442

 
$
101,772

 
$
107,876

30-89 days past due loans
 
$
10,588

 
$
9,067

 
$
11,816

 
$
8,870

 
$
18,470

Nonperforming loans to total loans
 
0.56
%
 
0.41
%
 
0.57
%
 
0.89
%
 
1.37
%
Nonperforming loans to total assets
 
0.42
%
 
0.31
%
 
0.43
%
 
0.67
%
 
0.99
%
Nonperforming assets to total assets
 
0.47
%
 
0.35
%
 
0.54
%
 
0.87
%
 
1.57
%
Allowance for loan losses as a percent of nonperforming loans
 
222
%
 
299
%
 
226
%
 
152
%
 
116
%

Nonperforming loans totaled $83.7 million at December 31, 2016, compared to $53.7 million at December 31, 2015. Nonperforming loan inflows, which are primarily composed of potential problem loans moving through the workout process (i.e., moving from potential problem to nonperforming status), were $87.7 million for the year ended December 31, 2016, with eight

58

credit relationships representing 85% of total inflows for 2016. Nonperforming loans as a percent of total loans were 0.56% at December 31, 2016, compared to 0.41% at December 31, 2015.

OREO totaled $10.2 million at December 31, 2016, compared to $7.3 million at the prior year end, with $7.0 million of total outstanding OREO at December 31, 2016 consisting of an individual property that was transferred into OREO during the year. This inflow was partially offset by sales of OREO and valuation adjustments as we continue to dispose and settle properties.

As a result of the activity described above for nonperforming loans and OREO, nonperforming assets increased $32.9 million from year end 2015 to $93.9 million at December 31, 2016. Nonperforming assets as a percentage of total assets were 0.47% at December 31, 2016, compared to 0.35% at December 31, 2015.

As of December 31, 2016, special mention and potential problem loans in aggregate totaled $303.0 million, increasing $50.5 million from December 31, 2015, reflecting some level of credit migration. As a percentage of total loans, special mention and potential problem loans were 2.0% at December 31, 2016, compared to 1.9% at the prior year end. At December 31, 2016, commercial loans comprised $114.1 million, or 92% of total potential problem loan, with four credit relationships representing over 50% of the total. Because our loan portfolio contains loans that may be larger in size, changes in the performance of larger credits may from time to time create fluctuations in our credit quality metrics, including nonperforming, special mention, and potential problem loans.


59

The following table presents changes in our nonperforming loans for the years ended December 31, 2016 and 2015.

Table 16
Nonperforming Loans Rollforward
(Amounts in thousands)
 
 
December 31,
 
2016
 
2015
Nonperforming loans:
 
 
 
Balance at beginning of year
$
53,749

 
$
67,544

Additions:
 
 
 
New nonaccrual loans (1)
87,722

 
44,259

Reductions:
 
 
 
Return to performing status
(2,068
)
 
(1,709
)
Paydowns and payoffs, net of advances
(33,657
)
 
(30,445
)
Net sales
(835
)
 
(5,107
)
Transfer to OREO
(10,199
)
 
(6,243
)
Transfer to loans held-for-sale
—

 
(667
)
Charge-offs
(11,024
)
 
(13,883
)
Total reductions
(57,783
)
 
(58,054
)
Balance at end of year
$
83,688

 
$
53,749

 
 
 
 
Nonaccruing troubled debt restructured loans (included in nonperforming loans):
 
 
 
Balance at beginning of period
$
39,171

 
$
36,298

Additions:
 
 
 
New nonaccrual troubled debt restructured loans (1)
23,501

 
34,204

Reductions:
 
 
 
Return to performing status
(1,221
)
 
(934
)
Paydowns and payoffs, net of advances
(14,282
)
 
(14,932
)
Net sales
(450
)
 
(1,047
)
Transfer to OREO
(1,098
)
 
(3,713
)
Charge-offs
(2,008
)
 
(10,705
)
Total reductions
(19,059
)
 
(31,331
)
Balance at end of period
$
43,613

 
$
39,171

(1) 
Amounts represent loan balances as of the end of the month in which loans were classified as new nonaccrual loans.
 
Credit Quality Management and Allowance for Credit Losses

We maintain an allowance for loan losses at a level management believes is sufficient to absorb credit losses inherent in the loan portfolio at the consolidated statements of financial condition date. 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 contains reserves for identified probable losses relating to specific borrowing relationships that are considered to be impaired (the “specific component” of the allowance) and for probable losses inherent in the loan portfolio that have not been specifically identified (the “general allocated component” of the allowance). The general allocated component 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 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” in Item 8 of this Form 10-K. The importance of certain estimates, assumptions and judgments to the determination of our allowance for loan losses is discussed in the “Critical Accounting Policies” section in this Item 7.

60


The following table presents our allocation of the allowance for loan losses by loan category for the past five years.

Table 17
Allocation of Allowance for Loan Losses
(Dollars in thousands)
 
 
As of December 31,
 
2016
 
% of
Total
 
2015
 
% of
Total
 
2014
 
% of
Total
 
2013
 
% of
Total
 
2012
 
% of
Total
Commercial
$
141,047

 
76
 
$
117,619

 
73
 
$
103,462

 
68
 
$
80,768

 
57
 
$
63,709

 
39
Commercial real estate
30,626

 
17
 
27,610

 
17
 
31,838

 
21
 
42,362

 
30
 
73,150

 
45
Construction
6,087

 
3
 
5,441

 
4
 
4,290

 
3
 
3,338

 
2
 
2,434

 
2
Residential real estate
3,734

 
2
 
4,239

 
3
 
5,316

 
3
 
7,555

 
5
 
9,696

 
6
Home equity
2,300

 
1
 
3,744

 
2
 
4,924

 
3
 
5,648

 
4
 
6,797

 
4
Personal
1,971

 
1
 
2,083

 
1
 
2,668

 
2
 
3,438

 
2
 
5,631

 
4
Total
$
185,765

 
100
 
$
160,736

 
100
 
$
152,498

 
100
 
$
143,109

 
100
 
$
161,417

 
100
Specific reserve
$
11,938

 
6
 
$
7,262

 
5
 
$
16,627

 
11
 
$
22,377

 
16
 
$
43,390

 
27
General reserve
$
173,827

 
94
 
$
153,474

 
95
 
$
135,871

 
89
 
$
120,732

 
84
 
$
118,027

 
73
Recorded Investment in Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance, specific reserve
$
149,690

 
 
 
$
70,295

 
 
 
$
90,289

 
 
 
$
114,414

 
 
 
$
199,760

 
 
Ending balance, general allocated reserve
14,906,551

 
 
 
13,196,180

 
 
 
11,801,930

 
 
 
10,529,607

 
 
 
9,940,222

 
 
Total loans at year end
$
15,056,241

 
 
 
$
13,266,475

 
 
 
$
11,892,219

 
 
 
$
10,644,021

 
 
 
$
10,139,982

 
 

Specific Component of the Allowance

The specific reserve requirement is the summation of individual reserves related to impaired loans that are analyzed on a loan-by-loan basis at the balance sheet date. At December 31, 2016, the specific reserve component of the allowance totaled $11.9 million, up from $7.3 million at December 31, 2015. The increase in specific reserves from year end 2015 was largely attributable to borrower irregularities identified during 2016 with a single lending relationship which added $7.6 million to such reserves. Of the $149.7 million in impaired loans at December 31, 2016, and the $70.3 million in impaired loans at December 31, 2015, 25% and 54%, respectively, required a specific reserve.

General Allocated Component of the Allowance

The general allocated component of the allowance is determined using a methodology that is a function of quantitative and qualitative factors and considerations applied to segments of our loan portfolio. Our methodology applies a historical loss model that takes into account at a product level (e.g., commercial, CRE, construction, etc.) the default and loss history of similar products or sub-products using a look-back period that begins in 2010 and is updated with monthly data on a lagged quarter to the most recent period.

Our methodology uses our default and loss history over the look-back period to establish a probability of default (“PD”) for each product type (and, in some cases, sub-segments within a product type) and risk rating, as well as an expected loss given default (“LGD”) for each product type. For our consumer portfolio, we assign a PD to each delinquency period and LGD to collateral position or size of credit for personal loans instead of product type. Our methodology applies the PD and LGD to the applicable loan balances and produces a loss estimate by product that is inclusive of the loss emergence period.

We assess the appropriate balance of the general allocated component of the reserve at the model loss emergence period based on a variety of internal and external quantitative and qualitative factors giving consideration to conditions that we believe are not fully reflected in the model-generated loss estimates. Topics considered in this assessment include changes in lending practices and procedures (e.g., underwriting standards) internally and in our industry, changes in business or economic conditions, changes in the nature and volume of loans, changes in staffing or management in our lending teams, changes in the quality of our results from loan reviews (which includes credit quality trends and risk rating accuracy), changes in underlying collateral values, recent portfolio performance, concentration risks, and other external factors such as legal or regulatory matters relevant to management’s assessment

61

of required reserve levels. In certain instances, these additional factors and judgments may lead to management’s conclusion that the appropriate level of the reserve differs from the amount determined through the model-driven quantitative framework, with respect to a given product type. In determining the amount of any qualitative adjustment to be made to the quantitative model output, management may adjust the PD and/or LGD for a product type (or a sub-segment within a product type) to reflect conditions that it does not believe are reflected in historical loss rates and apply those adjusted PDs and LGDs to determine the impact on the model output, with the result used to inform management’s determination of the appropriate qualitative adjustment to be made to the general allocated component for the product type. Such adjustments are typically informed through industry reports and statistics and other available source material.

In our evaluation of the quantitatively-determined amount and the adequacy of the allowance at December 31, 2016, we considered a number of factors for each product consistent with the considerations discussed in the prior paragraph. The following describes the primary management qualitative adjustments made to each product type in determining our reserve levels at December 31, 2016:

•
Commercial -Management increased the model output for this product type to reflect: the overall slowdown in the U.S. manufacturing industry by considering our own PD versus industry-wide default rates; increased leverage metrics on existing borrowers within the portfolio; and competitive loan structures in the industry. Management increased LGDs used for the general commercial and industrial segment to reduce the impact of recoveries relating to loans charged off in older periods. Management also increased the LGDs used for the asset-based lending sub-segment based on industry data because we do not have loss experience in recent years for this sub-segment.
•
Commercial Real Estate - Management increased the model output to reflect: industry level default rate experience in portfolios where we lack loss experience; compression of capitalization rates in the industry; and competitive loan structures in the industry. Management increased LGDs to reduce the impact of recoveries relating to loans charged off in older periods. Management also adjusted PD rates in instances where calculations using historical loss experience are not expected to be representative of management’s estimated losses at the consolidated statements of financial condition date.
•
Construction - Management increased the model output to reflect: industry level default rate experience in portfolios where we lack loss experience; compression of capitalization rates in the industry; and competition in the market and less stringent loan structures. Management also adjusted PD rates in instances where calculations using historical loss experience are not expected to be representative of management’s estimated losses at the consolidated statements of financial condition date.
•
Consumer - Management increased the model output to reflect: borrowers’ credit strength and willingness to purchase homes (e.g., due to high student debt levels); and general economic conditions and interest rate trends that impact these products.
Management also considers a pro-rated 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.
In determining our reserve levels at December 31, 2016, we established a general reserve that includes management’s qualitative assessment discussed above which increased the reserve to a higher output than the model’s quantitative output, in total. This judgment was influenced primarily by recent indicators in our commercial portfolio, such as the increasing leverage metrics for some existing borrowers, impact of commodity prices in certain sectors of the manufacturing portfolio, changes in underwriting standards, and volume and nature of loan growth, which have not yet been fully incorporated into the model output.

The general allocated component of the allowance increased by $20.4 million, or 13%, from $153.5 million at December 31, 2015, to $173.8 million at December 31, 2016. The increase in the general allocated reserve primarily reflects the $1.8 billion of growth in the loan portfolio during 2016 and changes in the credit quality of the existing portfolio for certain sectors in the commercial portfolio, specifically in the portfolio of leveraged commercial and industrial loans.

The establishment of the allowance for loan losses involves a high degree of judgment and estimation which includes an inherent level of imprecision given the difficulty of identifying all the factors impacting loan repayment and the timing of when losses will actually occur. While management utilizes its best judgment and available information, 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 is available to absorb credit losses across the entire loan portfolio.


62

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 December 31, 2016, 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).

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 following table presents changes in the allowance for loan losses, excluding covered assets, for the past five years.

Table 18
Allowance for Credit Losses and Summary of Loan Loss Experience
(Dollars in thousands)
 
Year Ended December 31,
2016
 
2015
 
2014
 
2013
 
2012
Change in allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of year
$
160,736

 
$
152,498

 
$
143,109

 
$
161,417

 
$
191,594

Loans charged-off:
 
 
 
 
 
 
 
 
 
Commercial
(8,427
)
 
(11,438
)
 
(5,588
)
 
(22,339
)
 
(31,768
)
Commercial real estate
(1,510
)
 
(1,458
)
 
(6,214
)
 
(25,294
)
 
(68,099
)
Construction
—

 
—

 
(6
)
 
70

 
(1,979
)
Residential real estate
(859
)
 
(494
)
 
(1,514
)
 
(3,501
)
 
(3,010
)
Home equity
(226
)
 
(716
)
 
(1,017
)
 
(3,445
)
 
(3,128
)
Personal
(225
)
 
(59
)
 
(158
)
 
(3,725
)
 
(10,044
)
Total charge-offs
(11,247
)
 
(14,165
)
 
(14,497
)
 
(58,234
)
 
(118,028
)
Recoveries on loans previously charged-off:
 
 
 
 
 
 
 
 
 
Commercial
1,082

 
4,396

 
6,340

 
5,054

 
4,179

Commercial real estate
795

 
1,209

 
2,674

 
2,173

 
8,709

Construction
119

 
204

 
79

 
48

 
2,315

Residential real estate
99

 
318

 
675

 
15

 
126

Home equity
165

 
507

 
228

 
475

 
509

Personal
62

 
1,102

 
721

 
997

 
1,137

Total recoveries
2,322

 
7,736

 
10,717

 
8,762

 
16,975

Net charge-offs
(8,925
)
 
(6,429
)
 
(3,780
)
 
(49,472
)
 
(101,053
)
Provisions charged to operating expense
33,954

 
14,667

 
13,169

 
31,164

 
70,876

Balance at end of year
$
185,765

 
$
160,736


$
152,498


$
143,109

 
$
161,417

Reserve for unfunded commitments (1)
$
17,140

 
$
11,759

 
$
12,274

 
$
9,206

 
$
7,343

Allowance for loan losses as a percent of loans
1.23
%
 
1.21
%
 
1.28
%
 
1.34
%
 
1.59
%
Average loans, excluding covered assets
$
14,049,715

 
$
12,617,346

 
$
11,199,985

 
$
10,228,385

 
$
9,457,541

Ratio of net charge-offs to average loans outstanding for the year
0.06
%
 
0.05
%
 
0.03
%
 
0.48
%
 
1.07
%
Allowance for loan losses as a percent of nonperforming loans
222
%
 
299
%
 
226
%
 
152
%
 
116
%
(1)    Included in other liabilities on the consolidated statements of financial condition.

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Activity in the Allowance for Loan Losses

The allowance for loan losses increased $25.0 million to $185.8 million at December 31, 2016, from $160.7 million at December 31, 2015, and was largely reflective of the $1.8 billion of loan growth during 2016 and some credit migration, including higher nonperforming loan levels that drove an increase in the specific reserve. The allowance for loan losses to total loans ratio was 1.23% at December 31, 2016, compared to 1.21% at December 31, 2015.

Gross charge-offs were $11.2 million for 2016, compared to $14.2 million for 2015. Commercial loans comprised 75% of total charge-offs in 2016, with 67% of total commercial charge-offs related to two relationships.

The provision for loan losses is the expense recognized in the consolidated statements of income to adjust the allowance for loan losses to the level deemed appropriate by management, as determined through application of our allowance methodology. The provision for loan losses for 2016 was $34.0 million, up from $14.7 million in 2015 and $13.2 million in 2014. The provision will fluctuate from period to period depending on the level of loan growth and unevenness in credit quality due to the size of individual credits, and we expect our provision expense going forward to be driven by changes to the general allocated reserve component due to overall loan growth and credit performance and, if necessary, any new specific reserves that may be required.

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 year ended December 31, 2016, our reserve for unfunded commitments increased $5.4 million from December 31, 2015 to $17.1 million and consists almost entirely of general reserves. During 2016, general reserves increased $5.8 million, driven by growth in residential construction commitments and increases in commercial special mention and potential problem commitments that resulted in higher requirements, while specific reserves declined as a result of credit resolutions during 2016. 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 $6.8 billion and $6.5 billion at December 31, 2016 and 2015, respectively. At December 31, 2016, unfunded commitments with maturities of less than one year approximated $1.9 billion. For further information on our unfunded commitments, refer to Note 19 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

COVERED ASSETS

Covered assets represent acquired residential mortgage loans and foreclosed loan collateral covered under a loss share 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 covered assets. The loss share agreement will expire on September 30, 2019.

Total covered assets, net of allowance for covered loan losses, declined $3.9 million, or 19%, from $21.2 million at December 31, 2015 to $17.3 million at December 31, 2016. The reduction was primarily attributable to $3.7 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. At December 31, 2016, the indemnification receivable totaled $939,000, compared to $1.7 million at December 31, 2015. Because the remaining covered assets largely represent single-family mortgages, we do not expect a significant change in balances from period to period. Total delinquent and nonperforming covered loans totaled $3.6 million at December 31, 2016 and $5.2 million at December 31, 2015.

FUNDING AND LIQUIDITY MANAGEMENT

We manage our liquidity position in order to meet our cash flow requirements, maintain sufficient capacity to meet our clients’ needs and accommodate fluctuations in asset and liability levels due to changes in our business operations. We also have 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.

We maintain liquidity at levels we believe sufficient to meet anticipated client liquidity needs, fund anticipated loan growth, and selectively purchase securities and investments. Liquid assets refer to cash on hand, Federal funds (“Fed funds”) sold and securities. Net liquid assets represent liquid assets less the amount of such assets pledged to secure deposits, repurchase agreements, FHLB advances and FRB borrowings that require collateral and to satisfy contractual obligations. Net liquid assets at the Bank were $4.0 billion and $2.9 billion at December 31, 2016 and 2015, respectively.


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The Bank’s principal sources of funds are commercial deposits, some of which are large institutional deposits and deposits that are classified for regulatory purposes as brokered deposits, and retail deposits. In addition to deposits, we utilize FHLB advances and other sources of funding to support our balance sheet and liquidity needs. Cash from operations is also a source of funds. The Bank’s principal uses of funds include funding growth in the loan portfolio and, to a lesser extent, our investment portfolio, which is designed to be highly liquid to serve collateral needs and support liquidity risk management. In managing our levels of cash on-hand, we consider factors such as reserve requirements at the Federal Reserve, deposit movement trends (which can be influenced by changing economic conditions, client specific needs to support their businesses, including transactions such as acquisitions and divestitures, and the overall composition of our deposit base) and other needs of the Bank.

The primary sources of funding for the Holding Company include dividends received from the Bank, intercompany tax reimbursements from the Bank, and proceeds from the issuance of senior and subordinated debt and equity. As an additional source of funding, the Holding Company has a 364-day revolving line of credit with a group of commercial banks allowing borrowings of up to $60.0 million in total. As of December 31, 2016, no amounts had been drawn on the facility. The Holding Company had $52.8 million in cash at December 31, 2016, compared to $61.5 million at December 31, 2015.

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 increased by $81.1 million from 2015 to $343.4 million for 2016. Cash flows from investing activities reflect the impact of growth in loans and investments acquired for our interest-earning asset portfolios, as well as asset maturities and sales. For 2016, net cash used in investing activities was $2.5 billion, compared to $1.7 billion for the prior year. This change in cash flows primarily represents larger amounts of cash redeployed towards the funding of loans in 2016. 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 2016 was $2.5 billion, compared to $1.4 billion for the prior year. The current period reflected growth in deposit accounts of $1.7 billion and net increase in FHLB advances of $820.0 million to support funding needs.

Deposits

Our deposit base is predominately composed of middle market commercial client relationships from a diversified industry base. We offer a suite of deposit and cash management products and services that support our efforts to attract and retain commercial clients. These deposits are generated principally through the development of long-term relationships with clients. Approximately 70% of our deposits at December 31, 2016, were accounts managed by our commercial business groups.

Through our community banking and private wealth groups, we offer a variety of small business and personal banking products, including checking, savings and money market accounts and certificates of deposit (“CDs”). Approximately 26% of our deposits at December 31, 2016, were accounts managed by our community banking and private wealth groups.

Public fund balances, denoting the funds held on account for municipalities and other public entities, are included as 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 December 31, 2016, we had public funds on deposit totaling $770.8 million, or approximately 5% of our deposits. Changes in public fund balances are influenced by the tax collection activities of the various municipalities as well as the general level of interest rates.


65

The following table presents the composition of deposits for the periods shown.

Table 19
Deposits (1) 
(Dollars in thousands)
 
 
As of December 31,
 
% Change
 
2016
 
% of
Total
 
2015
 
% of
Total
 
2014
 
% of
Total
 
2016-2015
 
2015-2014
Noninterest-bearing deposits
$
5,196,587

 
32
 
$
4,355,700

 
30
 
$
3,516,695

 
27
 
19
 
24

Interest-bearing demand deposits
1,942,992

 
12
 
1,503,372

 
11
 
1,907,320

 
15
 
29
 
-21

Savings deposits
439,689

 
3
 
377,191

 
3
 
319,100

 
2
 
17
 
18

Money market accounts
6,144,950

 
38
 
5,919,252

 
41
 
4,851,925

 
37
 
4
 
22

Time deposits
2,341,011

 
15
 
2,190,077

 
15
 
2,494,928

 
19
 
7
 
-12

Total deposits
$
16,065,229

 
100
 
$
14,345,592

 
100
 
$
13,089,968

 
100
 
12
 
10

(1) 
Excludes deposits held-for-sale of $122.2 million as of December 31, 2014.

Total deposits at December 31, 2016, increased $1.7 billion, or 12%, to $16.1 billion from year end 2015, driven primarily by increases of $840.9 million in noninterest-bearing demand deposits, $439.6 million in interest-bearing demand deposits, $225.7 million in money market deposits and $150.9 million in time deposits. Total average deposit growth since year end 2015 was $1.2 billion. Given the predominantly commercial nature of our client base, we experience fluctuations in our deposit base from time to time due to large deposit movements in certain client accounts, such as in connection with client-specific corporate acquisitions and divestitures. As a result, depending on the timing of these deposit movements, our quarter-end loan-to-deposit ratio can fluctuate from quarter to quarter. For example, our loan to deposit ratio was 92% at December 31, 2015, 93% at March 31, 2016, 96% at June 30, 2016, 95% at September 30, 2016 and 94% at December 31, 2016. In addition to the quarter to quarter fluctuations in deposit balances that we sometimes experience due to client-specific events, the nature of our commercial client base has historically led to gradually increasing deposit balances in the second half of the year compared to the first half, although there is no assurance that this historical trend will repeat in future years.

Of the $1.7 billion period-end increase in deposits from year end 2015, $556.2 million came from clients in the financial services industry. Financial services clients have a higher propensity to generate larger transactional flows than our typical commercial client, which can result in temporary deposits, especially around period ends. Furthermore, some of these deposits, particularly from hedge funds, correspondent commercial banks, fund administrators and futures commission merchants (“FCMs”), may exhibit elevated volatility due to the more complex liquidity and cash flow needs of the depositors given the nature of their businesses. This volatility can further contribute to the quarter-to-quarter fluctuations in our deposit base that we referenced in the preceding paragraph. Notwithstanding the larger transactional flows and potential for elevated volatility, we intend to continue utilizing deposits from financial services firms to meet our funding requirements from client needs, such as loan growth. In light of our loan-to-deposit levels and loan growth over the past several periods, our ability to continue growing our loan portfolio may be influenced in part by our ability to continue attracting deposits, including those from financial services clients.

Because of the predominantly commercial nature of our deposit base, including from the financial services industry, we historically have had larger average deposit balances per deposit relationship than a retail-focused bank. Furthermore, a meaningful portion of our deposit base is comprised of large commercial deposit relationships, some of which are classified as brokered deposits for regulatory purposes (as discussed in more detail below under “Brokered Deposits”). The following table presents a comparison of our large deposit relationships as of the dates shown. Of our large deposit relationships of $75 million or more shown in the table below, over one-half of the deposits are from financial services-related businesses.


66

Table 20
Large Deposit Relationships
(Dollars in thousands)
 
 
December 31,
 
2016
 
2015
 
2014
Ten largest depositors:
 
 
 
 
 
Deposit amounts
$
2,378,709

 
$
2,229,471

 
$
2,225,641

Percentage of total deposits
15
%
 
16
%
 
17
%
Classified as brokered deposits
$
1,399,271

 
$
1,255,315

 
$
1,442,195

Deposit Relationships of $75 Million or More:
 
 
 
 
 
Deposit amounts
$
4,383,939

 
$
3,247,548

 
$
3,285,598

Percentage of total deposits (all relationships)
27
%
 
23
%
 
25
%
Percentage of total deposits (financial services business only)
15
%
 
15
%
 
14
%
Number of deposit relationships
31

 
22

 
22

Classified as brokered deposits
$
2,284,536

 
$
1,752,329

 
$
1,936,653


Brokered Deposits

Table 21
Brokered Deposit Composition
(Dollars in thousands)
 
 
December 31,
 
2016
 
2015
 
2014
Noninterest-bearing demand deposits
$
398,015

 
$
381,723

 
$
107,564

Interest-bearing demand deposits
651,997

 
242,466

 
641,466

Savings
1,115

 
974

 
—

Money market deposits
1,706,459

 
1,818,091

 
1,448,663

Time deposits:
 
 
 
 
 
Traditional
505,817

 
437,235

 
564,116

CDARS (1)
150,656

 
208,086

 
521,995

Other
27,319

 
74,954

 
82,714

Total time deposits
683,792

 
720,275

 
1,168,825

Total brokered deposits
$
3,441,378

 
$
3,163,529

 
$
3,366,518

Brokered deposits as a % of total deposits
21
%
 
22
%
 
26
%
(1) 
The CDARS® deposit program is a deposit services arrangement that effectively achieves FDIC deposit insurance for jumbo deposit relationships.
 
The regulatory definition of brokered deposits includes any non-proprietary funds deposited, or referred for deposit, with a depository institution by a third party. “Traditional” brokered time deposits primarily refer to CDs issued in wholesale amounts through a broker-dealer and held in book-entry form at The Depository Trust & Clearing Corporation. The regulatory definition of brokered deposits also encompasses certain deposits that we generate through more direct relationships with third parties. Examples of these “non-traditional” brokered deposits include cash sweep programs operated by broker-dealers (“BDs”) with which we have entered into a contract to serve as a program bank (which are discussed in more detail below) and funds administered by service providers, such as escrow agents, title companies, mortgage servicers and property managers, on behalf of third parties. With respect to these third-party service providers, we may in some cases have additional banking relationships with them and their affiliates. Our non-traditional brokered deposits are maintained across various account types, including demand, money market and time deposits, based on the needs of our clients. We believe that many of these deposits, despite falling within the definition of brokered deposits for regulatory purposes, generally constitute a stable, cost-effective source of funding and, accordingly, from a liquidity risk management perspective, we view them differently from traditional brokered time deposits. We

67

consider the non-traditional brokered deposits as an important component of our relationship-based commercial banking business, whereas we use traditional brokered time deposits as a source of longer-term funding to complement deposits generated through relationships with our clients. As part of our liquidity risk management program, we consider characteristics other than regulatory classification, such as pricing, volatility, duration and our relationship with the depositor, when assessing the stability and overall value of deposits to us.

Total brokered deposits, as defined for regulatory reporting purposes, represented 21% of total deposits at December 31, 2016 and 22% at December 31, 2015. However, traditional brokered time deposits represented only 3% of total deposits at both December 31, 2016 and December 31, 2015. Traditional brokered time deposits have a weighted average maturity date of approximately 2 years.

As noted above, a significant source of non-traditional brokered deposits are cash sweep programs operated by BDs. At December 31, 2016 and December 31, 2015, $1.7 billion, or approximately 48%, and $1.5 billion, or approximately 48%, respectively, of our total regulatory-defined brokered deposits consisted of deposits from cash sweep programs operated by BDs for which we serve as a program bank. Cash sweep programs enable the BDs’ brokerage clients to “sweep” their cash balances into an omnibus bank deposit account established at a third-party depository institution by the BD as agent or custodian for the benefit of its clients. The contracts governing our participation as a program bank have a specified term, set forth the pricing terms for the deposits and generally provide for minimum and maximum deposit levels that the BDs will have with us at any given time.

Unlike traditional brokered time deposits, cash sweep program deposits are typically maintained in money market accounts and may be eligible for FDIC pass-through insurance. As of December 31, 2016, approximately 84% of the cash sweep program deposit balances were attributable to BDs who have had a deposit relationship with us for more than four years. In the above Table 20, Large Deposit Relationships, $1.7 billion of cash sweep program deposits were included in the deposit amounts attributable to deposit relationships of $75 million or more.

Borrowings

To supplement our deposit flows, we utilize a variety of wholesale funding sources and other borrowings both to fund our operations and serve as contingency funding. We maintain access to multiple external sources of funding to assist in the prudent management of funding costs, interest rate risk, and anticipated funding needs or other considerations. In addition, in constructing our overall mix of funding sources, we also factor in our desire to have a diversity of funding sources available to us. Some of our funding sources are accessible same-day, while others require advance notice, and some sources require the pledging of collateral, while others are unsecured. Our sources of additional funding liabilities are described below:

•
Fed Funds Counterparty Lines - Fed funds counterparty lines are immediately accessible uncommitted lines of credit from other financial institutions. The borrowing term is typically overnight. Availability of Fed funds lines fluctuates based on market conditions, counterparty relationship strength and the amount of excess reserve balances held by counterparties.
•
Federal Reserve Discount Window - The discount window at the Federal Reserve Bank (the “FRB”) is an additional source of overnight funding. We maintain access to the discount window primary credit program by pledging loans as collateral. Funding availability is uncommitted and primarily dictated by the amount of loans pledged and the advance rate applied by the FRB to the pledged loans. The amount of loans pledged to the FRB can fluctuate due to the availability of loans that are eligible under the FRB’s criteria, which include stipulations of documentation requirements, credit quality, payment status and other criteria.
•
Repurchase Agreements - Repurchase agreements are agreements to sell securities subject to an obligation to repurchase the same or similar securities at a specified maturity date, generally within 1 to 90 days from the transaction date. We generally use repurchase agreements to supplement our short-term funding needs.
•
FHLB Advances - As a member of the FHLB Chicago, we have access to borrowing capacity, which is uncommitted and subject to change based on the availability of acceptable collateral to pledge and the level of our investment in stock of the FHLB Chicago. FHLB advances can be either short-term or long-term borrowings. Short-term advances historically have had a term of one to three days. Of the $1.5 billion in outstanding short-term FHLB advances, $1.2 billion was repaid on January 3, 2017. The $50.0 million in outstanding long-term FHLB advances mature in 2019.
•
Revolving Line of Credit - The Company has a 364-day revolving line of credit (the “Facility”) with a group of commercial banks allowing borrowing of up to $60.0 million, and maturing on the earlier of September 22, 2017 or the consummation of the Company’s merger with CIBC. The interest rate applied to borrowings under the Facility will be elected by the Company at the time an advance is made; interest rate elections include either 30-day or 90-day LIBOR plus 1.75% or Prime minus 0.50% at the time the advance is made. Any amounts outstanding under the Facility upon or before maturity may be converted, at the Company’s option, to an amortized term loan, with the balance of such loan due September 22,

68

2019 (subject to earlier maturity upon consummation of the merger with CIBC, as previously noted). We maintain the line primarily as an additional source of funding and have not drawn on it since inception.
•
Long-Term Debt - As of December 31, 2016, we had outstanding $167.7 million of variable and fixed rate unsecured junior subordinated debentures issued to four statutory trusts that issued trust preferred securities, which currently qualify as Tier 1 capital and mature as follows: $8.2 million in 2034; $92.8 million in 2035 and $66.6 million in 2068. We also had outstanding $120.7 million of fixed rate unsecured subordinated debentures, which currently qualify as Tier 2 capital and mature in 2042.

In addition to the foregoing, we also have access to the brokered deposit market, through which we have numerous alternatives and significant capacity, if needed. The availability and access to the brokered deposit market is subject to market conditions, our capital levels, our counterparty strength and other factors.


69

The following table summarizes information regarding our outstanding borrowings and additional borrowing capacity for the periods presented.

Table 22
Borrowings
(Dollars in thousands)
 
 
2016
 
 
2015
 
 
2014
 
 
Amount
 
Rate (%)
 
 
Amount
 
Rate (%)
 
 
Amount
 
Rate (%)
 
Short-term
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at year end:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds
$
—

 
—
 
 
$
—

 
—
 
 
$
—

 
—
 
FRB discount window
—

 
—
 
 
—

 
—
 
 
—

 
—
 
Repurchase agreements
—

 
—
 
 
—

 
—
 
 
—

 
—
 
FHLB advances
1,540,000

 
0.63
 
 
370,000

 
0.16
 
 
428,000

 
0.13
 
Revolving line of credit (a)
—

 
—
 
 
—

 
—
 
 


 
—
 
Other borrowings
1,773

 
0.18
 
 
250

 
0.20
 
 
—

 
—
 
Total short-term borrowings (1)
$
1,541,773

 
 
 
 
$
370,250

 
 
 

$
428,000

 
 
 
Average for the year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds
$
314

 
0.56
 
 
$
—

 
—
 
 
$
—

 
—
 
Repurchase agreements
110,775

 
0.68
 
 
32,101

 
0.38
 
 
280

 
0.10
 
FHLB advances
645,916

 
0.36
 
 
192,403

 
0.17
 
 
38,233

 
0.37
 
Other borrowings
457

 
0.08
 
 
114

 
0.18
 
 
—

 
—
 
Total average short-term borrowings
$
757,462

 
 
 
 
$
224,618

 
 
 
 
$
38,513

 
 
 
Maximum month-end balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Repurchase agreements
$
409,269

 
 
 
 
$
150,801

 
 
 
 
$
—

 
 
 
FHLB advances
1,540,000

 
 
 
 
452,000

 
 
 
 
428,000

 
 
 
Other borrowings
1,773

 
 
 
 
414

 
 
 
 
7

 
 
 
Long-term
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at year end:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Junior subordinated debentures (a)
$
167,651

 
5.58
(2) 
 
$
167,609

 
5.31
(2) 
 
$
167,573

 
5.14
(2) 
Subordinated debentures (a)
120,659

 
7.13
 
 
120,606

 
7.13
 
 
120,556

 
7.13
 
FHLB advances
50,000

 
3.75
(3) 
 
400,000

 
0.58
(3) 
 
50,000

 
3.75
(3) 
Total long-term borrowings
$
338,310

 
 
 
 
$
688,215

 
 
 
 
$
338,129

 
 
 
Unused Availability:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds (4)
$
620,500

 
 
 
 
$
630,500

 
 
 
 
$
630,500

 
 
 
FRB discount window (5)
668,412

 
 
 
 
384,419

 
 
 
 
403,752

 
 
 
FHLB advances (6)
648,199

 
 
 
 
1,481,102

 
 
 
 
265,529

 
 
 
Revolving line of credit
60,000

 
 
 
 
60,000

 
 
 
 
60,000

 
 
 
(footnotes to the table are on following page)

70

(a) 
Represents a borrowing at the holding company. The other borrowings are at the Bank.
(1) 
Also included in short-term borrowings on the consolidated statements of financial condition but not included in this table are amounts related to certain loan participation agreements for loans originated by us that were classified as secured borrowings because they did not qualify for sale accounting treatment. As of December 31, 2016 and December 31, 2015, these loan participation agreements totaled $3.0 million and $2.2 million, respectively. Corresponding amounts were recorded within the loan balance on the consolidated statements of financial condition as of each of these dates.
(2) 
Represents a weighted-average interest rate as of such date for our four series of outstanding junior subordinated debentures.
(3) 
Represents a weighted-average interest rate as of such date for our outstanding long-term fixed-rate FHLB advances.
(4) 
Our total availability of overnight Fed funds borrowings is not a committed line of credit and is dependent upon lender availability.
(5) 
Our borrowing capacity changes each quarter subject to available collateral and FRB discount factors.
(6) 
Our FHLB borrowing availability is subject to change based on the availability of acceptable collateral for pledging (such as loans and securities) and the level of our investment in stock of the FHLB Chicago. We would be required to invest an additional $29.2 million in FHLB Chicago stock to obtain this level of borrowing capacity.

CONTRACTUAL OBLIGATIONS, COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENT LIABILITIES

Through our normal course of operations, we have entered into certain contractual obligations and other commitments. Such obligations generally relate to the funding of operations through deposits or debt issuances, as well as leases for premises and equipment. As a financial services provider, we routinely enter into commitments to extend credit. While contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval processes as funded loans.

The following table presents our significant fixed and determinable contractual obligations and significant commitments as of December 31, 2016. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

Table 23
Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet Items
(Amounts in thousands)

 
Financial Statement Note Reference (1)
 
Payments Due In (2)
 
 
 
 
Less Than
One Year
 
One to
Three Years
 
Three to    
Five Years
 
Over Five    
Years
 
Total
Deposits without a stated maturity
8
 
$
13,724,218

 
$
—

 
$
—

 
$
—

 
$
13,724,218

Time deposits (3)
8
 
1,546,897

 
434,280

 
359,613

 
221

 
2,341,011

Short-term borrowings
9
 
1,544,746

 
—

 
—

 
—

 
1,544,746

Long-term debt
10
 
—

 
50,000

 
—

 
288,310

 
338,310

Operating leases
6
 
13,668

 
27,411

 
25,607

 
46,420

 
113,106

Purchase obligations (4)
—
 
70,067

 
16,327

 
7,007

 
5,400

 
98,801

Commitments to extend credit:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines
19
 
 
 
 
 
 
 
 
 
14,880

All other commitments
19
 
 
 
 
 
 
 
 
 
6,425,501

Letters of credit:
 
 
 
 
 
 
 
 
 
 
 
Standby
19
 
 
 
 
 
 
 
 
 
369,418

Commercial
19
 
 
 
 
 
 
 
 
 
3,627

(1) 
Refer to “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.
(2) 
In the banking industry, interest-bearing obligations are principally utilized to fund interest-earning assets. As such, interest charges on related contractual obligations were excluded from reported amounts as the potential cash outflows would have corresponding cash inflows from interest-earning assets.
(3) 
Included $1.6 million of unamortized broker commissions.
(4) 
Purchase obligations exclude obligations for goods and services that already have been incurred and are reflected on our consolidated statements of financial condition.

71


Our operating lease obligations represent short- and long-term lease and rental payments for facilities, equipment, and certain software or data processing.

Purchase obligations at December 31, 2016 reflected the minimum obligation under legally binding contracts with contract terms that are both fixed and determinable. Our purchase obligations included payments under, among other things, consulting, outsourcing, data, advertising, sponsorship, software license and telecommunications agreements. Purchase obligations also included the estimated aggregate cash severance amounts that would be due to employees under employment contracts and arrangements, assuming all employees with such arrangements were involuntarily terminated on December 31, 2016.

Our commitments to fund community investments totaled $45.4 million, which represent future cash outlays for the construction and development of properties for low-income housing, small business real estate, and historic tax credit projects that qualify for CRA purposes. These commitments are not included in the contractual obligations table above, as the timing and amounts are based upon the financing arrangements provided in each project’s partnership or operating agreement and could change due to variances in the construction schedule, project revisions, or the cancellation of the project. Our civic contribution commitments are also not included in the table.

As of December 31, 2016, we had unrecognized tax benefits (exclusive of net interest expense accruals) that would favorably impact the effective tax rate by $3.3 million if recognized in future periods. Because the amount and timing of any future cash settlements cannot be predicted with reasonable certainty, this estimated liability has been excluded from the contractual obligations table above. Refer to Note 14 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K for additional information and disclosure related to uncertain tax positions.

CAPITAL

Equity totaled $1.9 billion at December 31, 2016, increasing $220.7 million compared to $1.7 billion at December 31, 2015, primarily attributable to $208.4 million of net income for the year ended December 31, 2016, and a $15.6 million decline in accumulated other comprehensive income, largely due to unrealized net securities losses on our available-for-sale investment portfolio.

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

We reissue treasury stock (at average cost), when available, or issue new shares to fulfill our obligation to issue shares granted pursuant to the share-based compensation plans. For the year ended December 31, 2016, we issued 882,716 shares of common stock (representing a combination of newly issued shares and the reissuance of treasury stock) in connection with such plans largely due to the exercise of stock options. We held no shares of voting common stock as treasury stock at December 31, 2016 and 2,574 shares at December 31, 2015.

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 2016, we repurchased 130,086 shares of common stock at an average value of $36.62 per share.

Dividends

We declared dividends of $0.04 per common share during 2016, unchanged from 2015. Based on the closing stock price at December 31, 2016 of $54.19, the annualized dividend yield on our common stock was 0.07%. The dividend payout ratio, which represents the percentage of common dividends declared to stockholders to basic earnings per share, was 1.53% for 2016, compared to 1.69% for 2015. Our Board of Directors periodically evaluates our dividend payout ratio, taking into consideration internal capital guidelines, and our strategic objectives and business plans, but we have no current plans to raise the amount of the dividends currently paid on our common stock. Furthermore, the merger agreement that we have entered into with CIBC restricts us from increasing our dividend prior to the merger without the prior consent of CIBC, which we would not expect to receive.

For additional information regarding limitations and restrictions on our ability to pay dividends, refer to the “Supervision and Regulation” and “Risk Factors” sections of this Form 10-K.


72

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 risk-based capital, common equity Tier 1 and the total risk-based capital ratios, which are calculated based on risk-weighted assets and off-balance sheet items that have been weighted according to broad risk categories.

In addition to the minimum risk-based capital requirements, we are required to maintain a minimum capital conservation buffer, in the form of common equity Tier 1 capital, in order to avoid restrictions on capital distributions (including dividends and stock repurchases) and discretionary bonuses to senior executive management. The required amount of the capital conservation buffer is being phased-in, beginning at 0.625% on January 1, 2016 and increasing by an additional 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019. We have included the 0.625% increase for 2016 in our minimum capital adequacy ratios in the table below. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. As of December 31, 2016, the Company and the Bank would meet all capital adequacy requirements on a fully phased-in basis as if all such requirements were currently in effect.

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 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.


73

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

Table 24
Capital Measurements (1) 
(Dollars in thousands)
 
Actual (1)
 
FRB Guidelines
For Minimum
Regulatory Capital Plus Capital Conservation Buffer
 
Regulatory Minimum
For “Well-Capitalized”
under FDICIA
 
December 31,
 
Ratio
 
Excess Over Regulatory Minimum at 12/31/16
 
Ratio
 
Excess Over “Well- Capitalized” under FDICIA at 12/31/16
 
2016
 
2015
 
 
 
 
Regulatory capital ratios:
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
12.49
%
 
12.37
%
 
8.625
%
 
$
719,959

 
n/a

 
n/a

The PrivateBank
12.17

 
11.91

 
n/a

 
n/a

 
10.00
%
 
$
403,399

Tier 1 risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
10.73

 
10.56

 
6.625
%
 
764,185

 
n/a

 
n/a

The PrivateBank
11.05

 
10.84

 
n/a

 
n/a

 
8.00
%
 
567,999

Tier 1 leverage:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
10.28

 
10.35

 
4.000
%
 
1,220,503

 
n/a

 
n/a

The PrivateBank
10.59

 
10.62

 
n/a

 
n/a

 
5.00
%
 
1,085,681

Common equity Tier 1:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
9.83

 
9.54

 
5.125
%
 
875,953

 
n/a

 
n/a

The PrivateBank
11.05

 
10.84

 
n/a

 
n/a

 
6.50
%
 
847,202

Other capital ratios (consolidated) (2):
 
 
 
 
 
 
 
 
 
 
 
Tangible common equity to tangible assets
9.14

 
9.34

 
 
 
 
 
 
 
 
 
(1) 
Computed in accordance with the applicable regulations of the FRB in effect as of the respective reporting periods.
(2) 
Ratio is not subject to formal FRB regulatory guidance and is a non-U.S. GAAP financial measure. Refer to Table 25, “Non-U.S. GAAP Financial Measures” for a reconciliation from non-U.S. GAAP to U.S. GAAP presentation.
n/a
Not applicable

As of December 31, 2016, all of our $167.7 million of outstanding junior subordinated debentures held by trusts that issued trust preferred securities are included in Tier 1 capital. All of our outstanding Trust Preferred Securities are redeemable by us at any time, subject to receipt of any required regulatory approvals, and, in the case of the remaining $66.6 million of 10% Debentures issued by PrivateBancorp Capital Trust IV, compliance with the terms of the replacement capital covenant. Upon completion of our pending merger with CIBC, we expect the outstanding Trust Preferred Securities will no longer qualify as Tier 1 capital and would be treated as Tier 2 capital under current FRB regulations. Furthermore, we understand that Trust Preferred Securities would not constitute regulatory capital for CIBC under capital adequacy guidelines in Canada. The post-merger capital structure of the successor holding company is currently under evaluation, including possible early redemption of some or all of the outstanding Trust Preferred Securities. Our outstanding 7.125% subordinated debentures due 2042, also Tier 2 instruments, are redeemable on or after October 30, 2017. Redemption of any of these securities would be subject to regulatory approval and no definitive plans regarding potential changes to post-merger capital structure have yet been made. The terms of the merger agreement restrict us from redeeming any securities prior to completion of the merger without CIBC’s consent.

For a full description of our junior subordinated debentures and subordinated debt, refer to Notes 10 and 11 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

For further details of the regulatory capital requirements and ratios as of December 31, 2016 and 2015 for the Company and the Bank, refer to Note 16 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.


74

IMPACT OF INFLATION

Our consolidated financial statements and the related notes thereto included in this report have been prepared in accordance with U.S. generally accepted accounting principles and practices within the banking industry. Under these principles and practices, we are required to measure our financial position in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Unlike many industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation. For analysis of our sensitivity to changes in interest rates, refer to the “Quantitative and Qualitative Disclosures about Market Risk” section at Item 7A of this Form 10-K.

NON-U.S. GAAP FINANCIAL MEASURES

This report 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, 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, 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 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.

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.


75

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

Table 25
Non-U.S. GAAP Financial Measures
(Amounts in thousands)
(Unaudited)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Taxable-equivalent net interest income
 
 
 
 
 
 
 
 
 
U.S. GAAP net interest income
$
582,426

 
$
514,415

 
$
454,737

 
$
421,063

 
$
419,933

Taxable-equivalent adjustment
4,852

 
4,322

 
3,233

 
3,247

 
2,873

Taxable-equivalent net interest income (a)
$
587,278

 
$
518,737

 
$
457,970

 
$
424,310

 
$
422,806

Average Earning Assets (b)
$
17,821,134

 
$
15,923,831

 
$
14,206,113

 
$
13,129,470

 
$
12,369,945

Net Interest Margin (a) / (b)
3.30
%
 
3.26
%
 
3.22
%
 
3.23
%
 
3.42
%
Net Revenue
 
 
 
 
 
 
 
 
 
Taxable-equivalent net interest income (a)
$
587,278

 
$
518,737

 
$
457,970

 
$
424,310

 
$
422,806

U.S. GAAP non-interest income
147,758

 
130,012

 
117,590

 
113,990

 
111,041

Net revenue (c)
$
735,036

 
$
648,749

 
$
575,560

 
$
538,300

 
$
533,847

Operating Profit
 
 
 
 
 
 
 
 
 
U.S. GAAP income before income taxes
$
324,001

 
$
296,400

 
$
248,207

 
$
199,943

 
$
132,417

Provision for loan and covered loan losses
33,710

 
14,790

 
12,044

 
31,796

 
71,425

Taxable-equivalent adjustment
4,852

 
4,322

 
3,233

 
3,247

 
2,873

Operating profit
$
362,563

 
$
315,512

 
$
263,484

 
$
234,986

 
$
206,715

Efficiency Ratio
 
 
 
 
 
 
 
 
 
U.S. GAAP non-interest expense (d)
$
372,473

 
$
333,237

 
$
312,076

 
$
303,314

 
$
327,132

Net revenue (c)
$
735,036

 
$
648,749

 
$
575,560

 
$
538,300

 
$
533,847

Efficiency ratio (d) / (c)
50.67
%
 
51.37
%
 
54.22
%
 
56.35
%
 
61.28
%
Adjusted Net Income
 
 
 
 
 
 
 
 
 
U.S. GAAP net income available to common stockholders
$
208,357

 
$
185,311

 
$
153,079

 
$
122,949

 
$
64,528

Amortization of intangibles, net of tax
1,328

 
1,505

 
1,823

 
1,889

 
1,626

Adjusted net income (e)
$
209,685

 
$
186,816

 
$
154,902

 
$
124,838

 
$
66,154

Average Tangible Common Equity
 
 
 
 
 
 
 
 
 
U.S. GAAP average total equity
$
1,834,762

 
$
1,601,451

 
$
1,403,532

 
$
1,259,249

 
$
1,316,121

Less: average goodwill
94,041

 
94,041

 
94,041

 
94,499

 
94,550

Less: average other intangibles
2,340

 
4,606

 
7,366

 
11,245

 
14,077

Less: average preferred stock
—

 
—

 
—

 
—

 
195,602

Average tangible common equity (f)
$
1,738,381

 
$
1,502,804

 
$
1,302,125

 
$
1,153,505

 
$
1,011,892

Return on average tangible common equity (e) / (f)
12.06
%
 
12.43
%
 
11.90
%
 
10.82
%
 
6.54
%


76

Table 25
Non-U.S. GAAP Financial Measures (Continued)
(Amounts in thousands)
(Unaudited)
 

 

 
 
 
As of December 31,
 
 
 
 
 
2014
 
2013
 
2012
Common Equity Tier 1
 
 
 
 
 
 
 
 
 
U.S. GAAP total equity
 
 
 
 
$
1,481,679

 
$
1,301,904

 
$
1,207,166

Trust preferred securities
 
 
 
 
169,788

 
244,793

 
244,793

Less: accumulated other comprehensive income, net of tax
 
 
 
 
20,917

 
9,844

 
48,064

Less: goodwill
 
 
 
 
94,041

 
94,041

 
94,521

Less: other intangibles
 
 
 
 
5,885

 
8,892

 
12,828

Less: disallowed servicing rights
 
 
 
 
44

 
—

 
—

Tier 1 risk-based capital
 
 
 
 
1,530,580

 
1,433,920

 
1,296,546

Less: trust preferred securities
 
 
 
 
169,788

 
244,793

 
244,793

Common equity Tier 1 (g)
 
 
 
 
$
1,360,792

 
$
1,189,127

 
$
1,051,753

 
As of December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Tangible Common Equity
 
 
 
 
 
 
 
 
 
U.S. GAAP total equity
$
1,919,675

 
$
1,698,951

 
$
1,481,679

 
$
1,301,904

 
$
1,207,166

Less: goodwill
94,041

 
94,041

 
94,041

 
94,041

 
94,521

Less: other intangibles
1,269

 
3,430

 
5,885

 
8,892

 
12,828

Tangible common equity (h)
$
1,824,365

 
$
1,601,480

 
$
1,381,753

 
$
1,198,971

 
$
1,099,817

Tangible Assets
 
 
 
 
 
 
 
 
 
U.S. GAAP total assets
$
20,053,773

 
$
17,252,848

 
$
15,596,724

 
$
14,076,480

 
$
14,048,167

Less: goodwill
94,041

 
94,041

 
94,041

 
94,041

 
94,521

Less: other intangibles
1,269

 
3,430

 
5,885

 
8,892

 
12,828

Tangible assets (i)
$
19,958,463

 
$
17,155,377

 
$
15,496,798

 
$
13,973,547

 
$
13,940,818

Risk-weighted Assets (j)
 
 
 
 
$
14,592,655

 
$
12,938,576

 
$
12,337,398

Period-end Common Shares Outstanding (k)
79,849

 
79,097

 
78,178

 
77,708

 
77,115

Ratios:
 
 
 
 
 
 
 
 
 
Common equity Tier 1 ratio (g) / (j) (1)
 
 
 
 
9.33
%
 
9.19
%
 
8.52
%
Tangible equity to tangible assets (h) / (i)
9.14
%
 
9.34
%
 
8.92
%
 
8.58
%
 
7.89
%
Tangible book value (h) / (k)
$
22.85

 
$
20.25

 
$
17.67

 
$
15.43

 
$
14.26

(1) 
Effective January 1, 2015, the common equity Tier 1 ratio became a required regulatory capital measure and is calculated in accordance with the new capital rules. Refer to Table 24, “Capital Measurements,” for 2016 and 2015 ratios.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with 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.


77

Our most significant accounting policies are presented in Note 1, “Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” of Item 8 of this Form 10-K. These policies, along with the disclosures presented in the other consolidated financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, 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, as discussed below.

Allowance for Loan Losses

We maintain an allowance for loan losses at a level management believes is sufficient to absorb credit losses inherent in our 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 consists of two components that are determined separately. The specific allocated component represents reserves for probable losses on specific loans that have been individually evaluated for impairment due to uncertainty about collectibility of all contractual amounts due. The general allocated component represents reserves for probable losses inherent in the remainder of our loans that have been collectively evaluated for impairment. The specific reserve for each loan evaluated individually is determined based on the loan’s observable fair value, fair value of underlying collateral or expected future cash flows. The general allocated component for collectively evaluated loans is determined using a methodology that is a function of quantitative and qualitative factors applied to segments of our loan portfolio. These factors are subject to significant management judgment, particularly with respect to qualitative factors. Refer to Note 1 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K for a more complete description of our methodology for determining the allowance for loan losses, including our accounting for impaired loans, determining the specific reserve related to an impaired loan and how we segment loans for purposes of determining the general allocated component.

Our allowance methodology for the general allocated component is a historical loss model based on loss experience using a look-back period that begins in 2010 and is updated with monthly data on a lagged quarter to the most recent period. Our model relies on a variety of estimates and assumptions, which are based both on our own loss experience and on external information, as well as management’s assessment of market and macroeconomic trends and conditions. Some of the significant estimates and assumptions used in our methodology are probability of default (“PD”), loss given default (“LGD”), loss emergence period (“LEP”) and qualitative factors, such as changes in current economic conditions or industry-wide underwriting standards, that may not be reflected in modeled results. Another important input in our model is the risk rating assigned to each of our loans, which is based on cash flow coverage. The quantitative output from the allowance model is sensitive to changes in PDs, LGDs and LEPs as well as changes in risk ratings for our loans (referred to as risk rating migration). Qualitative adjustments applied by management to the model output are sensitive to changes in economic conditions or industry developments and management’s interpretation of that information. To the extent actual outcomes differ from our estimates, assumptions and judgments, additional or less provision for credit losses may be required that would reduce or increase future earnings. Refer to the “Credit Quality Management and Allowance for Loan Losses” section in this Item 7 for a discussion about the determination of our allowance at December 31, 2016.

Goodwill and Intangible Assets

Goodwill represents the excess of purchase price over the fair value of net assets acquired using the acquisition method of accounting. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability.

Goodwill is allocated to reporting units at acquisition. The Company has two reporting units with allocated goodwill: Banking and Asset Management. Subsequent to initial recognition, goodwill is not amortized but, instead, is tested for impairment at the reporting unit level at least annually or more often if an event occurs or circumstances change that would indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded in earnings. Such a charge would have no impact on tangible or regulatory capital.

The goodwill impairment testing process is conducted by assigning net assets and goodwill to each reporting unit. In “step one,” the fair value of each reporting unit is compared to the recorded book value. Our step one calculation of each reporting unit’s fair value is based upon a simple average of two metrics: (1) a primary market approach, which measures fair value based upon trading multiples of independent publicly traded financial institutions of comparable size and character to the reporting units, and (2) an

78

income approach, which estimates fair value based upon discounted cash flows and terminal value (using the perpetuity growth method). If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired and “step two” is not considered necessary. If the carrying value of a reporting unit exceeds its fair value, the impairment test continues (“step two”) by comparing the carrying value of the reporting unit’s goodwill to the implied fair value of goodwill. The implied fair value of goodwill is determined using the residual approach, where the fair value of a reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit, calculated in step one, is the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment charge is recognized to the extent the carrying value of goodwill exceeds the implied fair value of goodwill.

The Company has the option at the time of our annual goodwill impairment test to perform a qualitative assessment for each reporting unit to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value before applying the existing two-step goodwill impairment test. If we conclude that this is the case, we would proceed with the existing two-step test, as described above. Otherwise, we would be able to bypass the two-step test and conclude that goodwill is not impaired from a qualitative perspective.

In conjunction with our annual goodwill impairment test performed as of October 31, 2016, we elected to perform a qualitative assessment to determine whether it was more likely than not that the fair values of the Banking and Asset Management reporting units were less than their carrying values. Based on our analysis, we determined it was not more likely than not that the fair values of the Banking and Asset Management reporting units were less than their carrying values, and as such we bypassed the two-step quantitative goodwill impairment test and concluded that goodwill was not impaired.

Goodwill impairment testing is considered a “critical accounting estimate” as estimates and assumptions are made about future performance and cash flows, as well as other prevailing market factors. Assumptions critical to the qualitative goodwill impairment assessment process include: macroeconomic, industry, and Company performance trends as compared to historical performance, forecasted earnings, and market indicators and trends, among other considerations. We provide the best information available at the time to be used in these estimates. Changes in these assumptions due to macroeconomic, industry-wide, or Company-specific developments subsequent to the date of our annual goodwill impairment test could affect the results of our goodwill impairment analysis.

Identified intangible assets that have a finite useful life are amortized over that life in a manner that reflects the estimated decline in the economic value of the identified intangible asset and are subject to impairment testing whenever events or changes in circumstances indicate that the carrying value may not be recoverable. During 2016, there were no events or circumstances to indicate that there may be impairment of intangible assets. Our intangible assets include core deposit premiums, client relationships, and assembled workforce intangibles. All of these intangible assets have finite lives and are amortized over varying periods not exceeding 12 years.

Income Taxes

The determination of income tax expense or benefit, and the amounts of current and deferred income tax assets and liabilities are based on complex analyses of many factors, including interpretations of federal and state income tax laws, current financial accounting standards, the difference between tax and financial reporting bases of assets and liabilities (temporary differences), assessments of the likelihood that the reversals of deferred deductible temporary differences will yield tax benefits, and estimates of reserves required for tax uncertainties. In addition, for interim reporting purposes, management generally determines its income tax provision, before consideration of any discrete items, based on its current best estimate of pre-tax income, permanent differences and the resulting effective tax rate expected for the full year.

We are subject to the federal income tax laws of the United States and the tax laws of the states and other jurisdictions where we conduct business. We periodically undergo examination by various governmental taxing authorities. Such authorities may require that changes in the amount of tax expense be recognized when their interpretations of tax law differ from those of management, based on their judgments about information available to them at the time of their examinations. There can be no assurance that future events, such as court decisions, new interpretations of existing law or positions by federal or state taxing authorities, will not result in tax liability amounts that differ from our current assessment of such amounts, the impact of which could be significant to future results.

Temporary differences may give rise to deferred tax assets or liabilities, which are recorded on our consolidated statements of financial condition. We assess the likelihood that deferred tax assets will be realized in future periods based on weighing both positive and negative evidence and establish a valuation allowance for those deferred tax assets for which recovery is unlikely, based on a standard of “more likely than not.” In making this assessment, we must make judgments and estimates regarding the

79

ability to realize these assets through: (a) the future reversal of existing taxable temporary differences, (b) future taxable income, (c) the possible application of future tax planning strategies, and (d) carryback to taxable income in prior years. We have not established a valuation allowance relating to our deferred tax assets at December 31, 2016. However, there is no guarantee that the tax benefits associated with these deferred tax assets will be fully realized. We have concluded, as of December 31, 2016, that it is more likely than not that such tax benefits will be realized.

In the preparation of income tax returns, tax positions are taken based on interpretations of federal and state income tax laws for which the outcome of such positions may not be certain. We periodically review and evaluate the status of uncertain tax positions and may establish tax reserves for tax benefits that may not be realized. The amount of any such reserves are based on the standards for determining such reserves as set forth in current accounting guidance and our estimates of amounts that may ultimately be due or owed (including interest). These estimates may change from time to time based on our evaluation of developments subsequent to the filing of the income tax return, such as tax authority audits, court decisions or other tax law interpretations. There can be no assurance that any tax reserves will be sufficient to cover tax liabilities that may ultimately be determined to be owed. At December 31, 2016, we had tax reserves established relating to uncertain tax positions that, if recognized, would favorably impact our effective tax rate by $3.3 million.

For additional discussion of income taxes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Income Taxes” and Notes 1 and 14 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

Fair Value Measurements

Certain of our assets and liabilities are measured at fair value at each reporting date, including securities available-for-sale, derivatives, and certain loans held-for-sale. Additionally, other assets are measured at fair value on a nonrecurring basis, including impaired loans and OREO, which are subject to fair value adjustments under certain circumstances.

We measure fair value in accordance with U.S. GAAP, which defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

U.S. GAAP establishes a fair value hierarchy that categorizes fair value measurements based on the observability of the valuation inputs used in determining fair value. Level 1 valuations are based on unadjusted quoted prices for identical instruments traded in active markets. Level 2 valuations are based on 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. Level 3 valuations use at least one significant unobservable input that is supported by little or no market activity.

Judgment is required to determine whether certain assets measured at fair value are included in Level 2 or Level 3. When making this judgment, we consider the information available to us, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs used. Classification of Level 2 or Level 3 is based upon the specific facts and circumstances of each instrument or instrument category and judgments are made regarding the significance of the unobservable inputs to the instrument’s fair value measurement in its entirety. If unobservable inputs are considered significant, the instrument is classified as Level 3.

Judgment is also required when determining the fair value of an asset or liability when either relevant observable inputs do not exist or available observable inputs are in a market that is not active. When relevant observable inputs are not available, we must use our own assumptions about future cash flows and appropriately risk-adjusted discount rates. Conversely, in some cases observable inputs may require significant adjustments. For example, in cases where the volume and level of trading activity in an asset or liability is very limited, actual transaction prices vary significantly over time or among market participants, or the prices are not current, the observable inputs may not be relevant and could require adjustment.

We use a variety of methods to measure the fair value of financial instruments on a recurring basis and to validate the overall reasonableness of the fair values obtained from external sources on at least a quarterly basis, 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 Company knowledge of market liquidity and other market-related conditions. 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 at the reporting date. The inability to precisely measure the fair value of certain assets, such as OREO, may lead to changes in the fair value of those assets over time as unobservable inputs change, which can result in volatility in the amount of income or loss recorded for a particular position from quarter to quarter.

Additional information regarding fair value measurements is included in Note 20 of “Notes to the Consolidated Financial Statements” in Item 8 of this Form 10-K.

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ITEM 7A. 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 currently use interest rate derivatives 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.

The majority of our interest-earning assets are floating-rate instruments. At December 31, 2016, approximately 81% of the total loan portfolio is indexed to LIBOR, including 71% indexed to one month LIBOR, and 15% of the total loan portfolio is indexed to the prime rate. Of the $10.4 billion in loans maturing after one year with a floating interest rate, $1.2 billion are subject to interest rate floors, of which 33% were in effect at December 31, 2016 and are reflected in the interest sensitivity analysis below. Commencing in 2016, we have included contractual language in loan agreements that establishes a floor of 0% for loans with LIBOR indices, protecting the Company in the event of negative LIBOR rates. 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 re-prices assets and liabilities based on the contractual terms and market rates in effect at the beginning of the measurement period assuming instantaneous parallel shifts in the applicable yield curves and instruments then remain at that new interest rate through the end of the twelve-month measurement period. The model analyzes changes in the portfolios based only on assets and liabilities at the beginning of the measurement period and does not assume any asset or liability growth over the following twelve months.

The sensitivity analysis is based on numerous assumptions including: the nature and timing of interest rate levels, the shape of the yield curve, prepayments on loans and securities, levels of excess deposits, 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 change 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 macroeconomic factors, anticipated client behavior and anticipated Company and market pricing behavior, all of which may occur in dynamic and non-linear fashion. We routinely conduct historical deposit re-pricing and deposit lifespan/retention analyses and adjust our forward-looking assumptions related to client and market behavior. Based on our analyses and judgments, we recently modified 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.


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Based on our current simulation modeling assumptions, the following table shows the estimated impact of an immediate change in interest rates as of December 31, 2016 and 2015.

Analysis of Net Interest Income Sensitivity
(Dollars in thousands)
 
 
Immediate Change in Rates
 
-50
 
+50
 
+100
 
+200
 
+300
December 31, 2016
 
 
 
 
 
 
 
 
 
Dollar change
$
(33,101
)
 
$
22,143

 
$
44,924

 
$
82,320

 
$
112,094

Percent change
-5.5
 %
 
3.6
%
 
7.4
%
 
13.6
%
 
18.5
%
December 31, 2015
 
 
 
 
 
 
 
 
 
Dollar change
$
(27,635
)
 
$
16,643

 
$
34,168

 
$
64,619

 
$
88,331

Percent change
-5.3
 %
 
3.2
%
 
6.6
%
 
12.4
%
 
17.0
%

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 December 31, 2016, net interest income would increase by $44.9 million, or 7.4%, over a twelve-month period, as compared to a net interest income increase of $34.2 million, or 6.6%, if there had been an instantaneous parallel shift of +100 basis points at December 31, 2015. The increase in the above interest rate asset sensitivity at December 31, 2016 compared to December 31, 2015, is due to a net increase in rate-sensitive assets. Rate-sensitive assets, particularly loans indexed to short-term rates, increased during the year ended December 31, 2016. The increase was funded by rate-sensitive liabilities, primarily deposits and short-term borrowings. Overall asset sensitivity increased during 2016 due primarily to asset and liability compositional changes, including a decrease in our cash flow hedge portfolio. Based on our modeling, the Company remains in an asset sensitive position and expects to benefit from the rise in interest rates. We note, however, that 81% of our loans are indexed to LIBOR, mostly one-month LIBOR, and there can be no guarantee that action by the Federal Reserve to raise the target Fed funds rate will cause an immediate parallel shift in short-term LIBOR. We will continue to periodically review and refine, as appropriate, the assumptions used in our interest rate risk modeling.


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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of PrivateBancorp, Inc.

We have audited the accompanying consolidated statements of financial condition of PrivateBancorp, Inc. (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 28, 2017, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Chicago, Illinois
February 28, 2017


83

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except shares and per share data or otherwise noted)
 
 
December 31,
 
2016
 
2015
Assets
 
 
 
Cash and due from banks
$
161,168

 
$
145,147

Federal funds sold and interest-bearing deposits in banks
587,563

 
238,511

Loans held-for-sale
103,284

 
108,798

Securities available-for-sale, at fair value (pledged as collateral to creditors: $86.6 million - 2016; $100.2 million - 2015)
2,013,525

 
1,765,366

Securities held-to-maturity, at amortized cost (fair value: $1.7 billion - 2016; $1.4 billion - 2015)
1,738,123

 
1,355,283

Federal Home Loan Bank ("FHLB") stock
54,163

 
26,613

Loans – excluding covered assets, net of unearned fees
15,056,241

 
13,266,475

Allowance for loan losses
(185,765
)
 
(160,736
)
Loans, net of allowance for loan losses and unearned fees
14,870,476

 
13,105,739

Covered assets
22,063

 
26,954

Allowance for covered loan losses
(4,766
)
 
(5,712
)
Covered assets, net of allowance for covered loan losses
17,297

 
21,242

Other real estate owned, excluding covered assets
10,203

 
7,273

Premises, furniture, and equipment, net
46,967

 
42,405

Accrued interest receivable
57,986

 
45,482

Investment in bank owned life insurance
58,115

 
56,653

Goodwill
94,041

 
94,041

Other intangible assets
1,269

 
3,430

Derivative assets
27,965

 
40,615

Other assets 
211,628

 
196,250

Total assets 
$
20,053,773

 
$
17,252,848

Liabilities
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
5,196,587

 
$
4,355,700

Interest-bearing
10,868,642

 
9,989,892

Total deposits
16,065,229

 
14,345,592

Short-term borrowings
1,544,746

 
372,467

Long-term debt
338,310

 
688,215

Accrued interest payable
9,063

 
7,080

Derivative liabilities
18,122

 
18,229

Other liabilities
158,628

 
122,314

Total liabilities 
18,134,098

 
15,553,897

Equity
 
 
 
Common stock (no par value, $1 stated value; authorized shares: 174 million; issued shares: 79,849,213 - 2016 and 79,099,157 - 2015)
79,313

 
78,439

Treasury stock, at cost (0 - 2016 and 2,574 - 2015)
—

 
(103
)
Additional paid-in capital
1,101,946

 
1,071,674

Retained earnings
736,798

 
531,682

Accumulated other comprehensive income, net of tax
1,618

 
17,259

Total equity
1,919,675

 
1,698,951

Total liabilities and equity 
$
20,053,773

 
$
17,252,848

See accompanying notes to consolidated financial statements.

84

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Interest Income
 
 
 
 
 
Loans, including fees
$
591,051

 
$
517,461

 
$
463,755

Federal funds sold and interest-bearing deposits in banks
1,477

 
903

 
770

Securities:
 
 
 
 
 
Taxable
62,542

 
55,283

 
53,500

Exempt from Federal income taxes
9,326

 
8,270

 
6,173

Other interest income
622

 
295

 
189

Total interest income
665,018

 
582,212

 
524,387

Interest Expense
 
 
 
 
 
Deposits
58,574

 
47,106

 
41,951

Short-term borrowings
3,413

 
656

 
638

Long-term debt
20,605

 
20,035

 
27,061

Total interest expense
82,592

 
67,797

 
69,650

Net interest income
582,426

 
514,415

 
454,737

Provision for loan and covered loan losses
33,710

 
14,790

 
12,044

Net interest income after provision for loan and covered loan losses
548,716

 
499,625

 
442,693

Non-interest Income
 
 
 
 
 
Asset management
21,120

 
17,958

 
17,268

Mortgage banking
15,895

 
14,079

 
10,245

Capital markets products
25,323

 
18,530

 
18,047

Treasury management
33,942

 
30,641

 
27,472

Loan, letter of credit and commitment fees
21,343

 
20,648

 
19,311

Syndication fees
20,956

 
17,205

 
19,514

Deposit service charges and fees and other income
8,068

 
10,129

 
5,203

Net securities gains
1,111

 
822

 
530

Total non-interest income
147,758

 
130,012

 
117,590

Non-interest Expense
 
 
 
 
 
Salaries and employee benefits
227,777

 
205,019

 
182,192

Net occupancy and equipment expense
29,162

 
28,214

 
27,417

Technology and related costs
23,722

 
18,761

 
17,122

Marketing
17,496

 
16,122

 
13,441

Professional services
18,884

 
11,320

 
11,761

Outsourced servicing costs
6,201

 
7,494

 
6,864

Net foreclosed property expenses
3,524

 
4,210

 
8,681

Postage, telephone, and delivery
3,426

 
3,582

 
3,400

Insurance
15,796

 
13,972

 
12,451

Loan and collection expense
8,132

 
8,556

 
6,765

Other expenses
18,353

 
15,987

 
21,982

Total non-interest expense
372,473

 
333,237

 
312,076

Income before income taxes
324,001

 
296,400

 
248,207

Income tax provision
115,644

 
111,089

 
95,128

Net income available to common stockholders
$
208,357

 
$
185,311

 
$
153,079

Per Common Share Data
 
 
 
 
 
Basic earnings per share
$
2.62

 
$
2.36

 
$
1.96

Diluted earnings per share
$
2.57

 
$
2.32

 
$
1.94

Cash dividends declared
$
0.04

 
$
0.04

 
$
0.04

Weighted-average common shares outstanding
78,900

 
77,968

 
77,007

Weighted-average diluted common shares outstanding
80,484

 
79,206

 
77,822

See accompanying notes to consolidated financial statements.

85

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Net income
$
208,357

 
$
185,311

 
$
153,079

Other comprehensive income:
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
Net unrealized (losses) gains
(27,628
)
 
(7,440
)
 
11,244

Reclassification of net gains included in net income
(1,111
)
 
(1,287
)
 
(530
)
Income tax benefit (expense)
11,215

 
3,327

 
(4,226
)
Net unrealized (losses) gains on available-for-sale securities
(17,524
)
 
(5,400
)
 
6,488

Cash flow hedges:
 
 
 
 
 
Net unrealized gains
10,282

 
13,152

 
16,777

Reclassification of net gains included in net income
(7,235
)
 
(10,320
)
 
(9,262
)
Income tax expense
(1,164
)
 
(1,090
)
 
(2,930
)
Net unrealized gains on cash flow hedges
1,883

 
1,742

 
4,585

Other comprehensive (loss) income
(15,641
)
 
(3,658
)
 
11,073

Comprehensive income
$
192,716

 
$
181,653

 
$
164,152

See accompanying notes to consolidated financial statements.


86

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in thousands, except per share data)
 
 
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, 2014
77,707

 
 
$
76,825

 
$
(6,415
)
 
$
1,022,023

 
$
199,627

 
$
9,844

 
$
1,301,904

Comprehensive income (1)
—

 
 
—

 
—

 
—

 
153,079

 
11,073

 
164,152

Cash dividends declared ($0.04 per common share)
—

 
 
—

 
—

 
—

 
(3,150
)
 
—

 
(3,150
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonvested (restricted) stock grants
378

 
 
(244
)
 
5,607

 
(5,363
)
 
—

 
—

 
—

Exercise of stock options
277

 
 
93

 
5,340

 
(284
)
 
—

 
—

 
5,149

Restricted stock activity
(16)

 
 
537

 
360

 
(897
)
 
—

 
—

 
—

Deferred compensation plan
13

 
 
—

 
385

 
64

 
—

 
—

 
449

Excess tax benefit from share-based compensation
—

 
 
—

 
—

 
2,937

 
—

 
—

 
2,937

Stock repurchased in connection with benefit plans
(181)

 
 
—

 
(5,330
)
 
—

 
—

 
—

 
(5,330
)
Share-based compensation expense
—

 
 
—

 
—

 
15,568

 
—

 
—

 
15,568

Balance at December 31, 2014
78,178

 
 
$
77,211

 
$
(53
)
 
$
1,034,048

 
$
349,556

 
$
20,917

 
$
1,481,679

Comprehensive income (1)
—

 
 
—

 
—

 
—

 
185,311

 
(3,658
)
 
181,653

Cash dividends declared ($0.04 per common share)
—

 
 
—

 
—

 
—

 
(3,185
)
 
—

 
(3,185
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonvested (restricted) stock grants
252

 
 
—

 
—

 
—

 
—

 
—

 
—

Exercise of stock options
835

 
 
666

 
5,903

 
14,369

 
—

 
—

 
20,938

Restricted stock activity
2

 
 
561

 
—

 
(561
)
 
—

 
—

 
—

Deferred compensation plan
2

 
 
1

 
29

 
355

 
—

 
—

 
385

Excess tax benefit from share-based compensation
—

 
 
—

 
—

 
4,624

 
—

 
—

 
4,624

Stock repurchased in connection with benefit plans
(172)

 
 
—

 
(5,982
)
 
—

 
—

 
—

 
(5,982
)
Share-based compensation expense
—

 
 
—

 
—

 
18,839

 
—

 
—

 
18,839

Balance at December 31, 2015
79,097

 
 
$
78,439

 
$
(103
)
 
$
1,071,674

 
$
531,682

 
$
17,259

 
$
1,698,951

Comprehensive income (1)
—

 
 
—

 
—

 
—

 
208,357

 
(15,641
)
 
192,716

Cash dividends declared ($0.04 per common share)
—

 
 
—

 
—

 
—

 
(3,241
)
 
—

 
(3,241
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonvested (restricted) stock grants
266

 
 
—

 
—

 
—

 
—

 
—

 
—

Exercise of stock options
573

 
 
456

 
4,252

 
9,942

 
—

 
—

 
14,650

Restricted stock activity
37

 
 
414

 
464

 
(878
)
 
—

 
—

 
—

Deferred compensation plan
6

 
 
4

 
81

 
542

 
—

 
—

 
627

Stock repurchased in connection with benefit plans
(130
)
 
 
—

 
(4,694
)
 
(71
)
 
—

 
—

 
(4,765
)
Share-based compensation expense
—

 
 
—

 
—

 
20,737

 
—

 
—

 
20,737

Balance at December 31, 2016
79,849

 
 
$
79,313

 
$
—

 
$
1,101,946

 
$
736,798

 
$
1,618

 
$
1,919,675

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

87

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Operating Activities
 
 
 
 
 
Net income
$
208,357

 
$
185,311

 
$
153,079

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Provision for loan and covered loan losses
33,710

 
14,790

 
12,044

Provision (release) for unfunded commitments
5,381

 
(519
)
 
3,152

Depreciation and impairment of premises, furniture, and equipment
9,374

 
8,457

 
8,693

Net amortization of premium on securities
24,096

 
17,888

 
14,899

Net gains on sale of securities
(1,111
)
 
(822
)
 
(530
)
Valuation adjustments on other real estate owned
2,757

 
2,356

 
6,479

Net losses on sale of other real estate owned
392

 
1,267

 
189

Net (accretion) amortization of discount on covered assets
(51
)
 
298

 
136

Bank owned life insurance income
(1,462
)
 
(1,446
)
 
(1,342
)
Net increase (decrease) in deferred fees and unamortized discounts and premiums on loans
2,789

 
(4,156
)
 
9,954

Share-based compensation expense
20,737

 
18,839

 
15,568

Excess tax benefit from exercise of stock options and vesting of restricted shares
(3,690
)
 
(5,329
)
 
(3,588
)
Deferred income tax benefit
(16,508
)
 
(1,821
)
 
(8,184
)
Amortization of other intangibles
2,161

 
2,455

 
3,007

Originations and purchases of loans held-for-sale
(621,559
)
 
(623,756
)
 
(518,147
)
Proceeds from sales of loans held-for-sale
643,571

 
641,596

 
438,254

Net gains from sales of loans held-for-sale
(16,944
)
 
(11,793
)
 
(8,199
)
Gain on sale of branch
—

 
(4,092
)
 
—

Net decrease (increase) in derivative assets and liabilities
12,543

 
(6,091
)
 
(16,763
)
Net increase in accrued interest receivable
(12,504
)
 
(4,951
)
 
(3,527
)
Net increase in accrued interest payable
1,983

 
132

 
622

Net increase (decrease) in other assets
14,674

 
5,348

 
(30,437
)
Net increase in other liabilities
34,671

 
28,346

 
19,269

Net cash provided by operating activities
343,367

 
262,307

 
94,628

Investing Activities
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
Proceeds from maturities, prepayments, and calls
214,609

 
209,536

 
232,967

Proceeds from sales
45,446

 
90,777

 
74,690

Purchases
(549,001
)
 
(439,536
)
 
(349,320
)
Held-to-maturity securities:
 
 
 
 
 
Proceeds from maturities, prepayments, and calls
221,687

 
161,787

 
120,844

Purchases
(615,464
)
 
(394,377
)
 
(333,553
)
Net (purchase) redemption of FHLB stock
(27,550
)
 
2,053

 
1,339

Net increase in loans
(1,811,679
)
 
(1,382,771
)
 
(1,270,685
)
Net decrease in covered assets
4,240

 
7,277

 
67,564

Proceeds from sale of other real estate owned
4,120

 
12,763

 
13,936

Net purchases of premises, furniture, and equipment
(13,936
)
 
(11,719
)
 
(8,174
)
Net cash used in investing activities
(2,527,528
)
 
(1,744,210
)
 
(1,450,392
)
Financing Activities
 
 
 
 
 
Net increase in deposit accounts, including deposits held-for-sale
1,719,637

 
1,133,408

 
1,198,543

Net increase (decrease) in short-term borrowings, excluding FHLB advances
2,279

 
(1,918
)
 
(2,015
)
Net increase in FHLB advances
820,000

 
292,000

 
218,000

Repayment of long-term debt
—

 
—

 
(75,005
)
Stock repurchased in connection with benefit plans
(4,765
)
 
(5,982
)
 
(5,330
)
Cash dividends paid
(3,194
)
 
(3,151
)
 
(3,125
)
Proceeds from exercise of stock options and issuance of common stock under benefit plans
15,277

 
21,323

 
5,598

Excess tax benefit from exercise of stock options and vesting of restricted shares
—

 
5,329

 
3,588

Net cash provided by financing activities
2,549,234

 
1,441,009

 
1,340,254

Net increase (decrease) in cash and cash equivalents
365,073

 
(40,894
)
 
(15,510
)
Cash and cash equivalents at beginning of year
383,658

 
424,552

 
440,062

Cash and cash equivalents at end of year
$
748,731

 
$
383,658

 
$
424,552

See accompanying notes to consolidated financial statements.

88

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Amounts in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
 
Cash paid for interest
$
80,609

 
$
67,666

 
$
69,028

Cash paid for income taxes
120,257

 
107,477

 
99,820

Non-cash transfers:
 
 
 
 
 
Loans to loans held-for-sale
150,634

 
164,355

 
182,831

Loans to other real estate
10,199

 
6,243

 
8,753

Covered assets to loans
—

 
—

 
28,692

Covered asset OREO to other real estate
—

 
—

 
719

Deposits to deposits held-for-sale
—

 
—

 
122,216

See accompanying notes to consolidated financial statements.

89

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – PrivateBancorp, Inc. (“PrivateBancorp” or the “Company”) was incorporated in Delaware in 1989 and became a holding company registered under the Bank Holding Company Act of 1956, as amended. The PrivateBank and Trust Company (the “Bank” or the “PrivateBank”), the sole banking subsidiary of PrivateBancorp, was opened in Chicago in 1991. The Company completed its initial public offering in June 1999. The Bank provides customized business and personal financial services to middle market companies and business owners, executives, entrepreneurs and families in all of the markets and communities it serves.

On June 29, 2016, the Company entered into a definitive merger agreement with Canadian Imperial Bank of Commerce (“CIBC”), a Canadian chartered bank, and CIBC Holdco Inc. (“Holdco”), a newly-formed Delaware corporation and a direct, wholly owned subsidiary of CIBC, which contemplates that the Company will merge with and into Holdco, with Holdco surviving the merger. Closing of the transaction remains subject to the receipt of required regulatory and stockholder approvals and other customary closing conditions. Following the merger, the Bank will be headquartered in Chicago, Illinois, retain its Illinois state banking charter and be an indirect, wholly owned subsidiary of CIBC.

Under the terms of the definitive agreement, shareholders of the Company will receive $18.80 in cash and 0.3657 of a CIBC common share for each share of PrivateBancorp common stock. As of June 28, 2016, the last trading day before public announcement of the transaction, total consideration for the transaction was valued at approximately $3.8 billion, or $47.00 per share of common stock of the Company, based on CIBC’s closing stock price on June 28, 2016 of $77.11. As of such date, the aggregate consideration would have been paid with approximately $1.5 billion in cash and approximately 29.5 million common shares of CIBC, representing a 40 percent cash and 60 percent share mix. The actual transaction value will be based on the number of shares of common stock of the Company outstanding at the closing and the price of CIBC common stock as of the closing.

The full text of and additional information about the definitive merger agreement is included in the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission (“SEC”) on July 6, 2016.

Direct costs related to the proposed transaction were expensed as incurred and totaled $6.7 million for the year ended December 31, 2016. These costs were primarily comprised of financial advisor and other professional services fees.

Principles of Consolidation and Basis of Presentation – The accompanying consolidated financial statements include the accounts and results of operations of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. In general, investments in unconsolidated entities where the Company has the ability to exercise significant influence over the entities’ operating and financing decisions are accounted for using the equity method of accounting. Investments that do not meet the criteria for equity method accounting are accounted for using the cost method of accounting. Assets held in a fiduciary or agency capacity are not assets of the Company or its subsidiaries, and accordingly, are not included in the consolidated financial statements.

The accounting and reporting policies of the Company and its subsidiaries conform to U.S. generally accepted accounting principles (“U.S. GAAP”) and general practice within the banking industry. We use the accrual basis of accounting for financial reporting purposes.

Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

In preparing the consolidated financial statements, we have considered the impact of events occurring subsequent to December 31, 2016 for potential recognition or disclosure in this annual report on Form 10-K. The following is a summary of the significant accounting policies adhered to in the preparation of the consolidated financial statements.

Business Combinations – Business combinations are accounted for under the acquisition method of accounting. Under the acquisition method, assets and liabilities of the business acquired are recorded at their estimated fair value as of the date of acquisition, with any excess of the cost of the acquisition over the fair value of the net tangible and identifiable intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the consolidated statements of income from the effective date of acquisition.

Use of Estimates – 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.

90


Cash and Cash Equivalents – For purposes of the consolidated statements of cash flows, management has defined cash and cash equivalents to include cash and due from banks, federal funds sold, and other interest-bearing deposits in banks. Generally, federal funds are sold for one-day periods, but not longer than 30 days. Short-term investments generally mature in less than 30 days. All cash and cash equivalents have maturities of three months or less.

Debt Securities – At the time of purchase, debt securities are classified as held-to-maturity or available-for-sale. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are carried at amortized cost. Debt securities are classified as available-for-sale when management has the intent and ability to hold such securities for an indefinite period of time, but not necessarily to maturity. Any decision to sell available-for-sale securities would be based on various factors, including but not limited to asset/liability management strategies, changes in interest rates or prepayment risks, liquidity needs, or regulatory capital considerations. Available-for-sale securities are carried at fair value with unrealized gains and losses, net of related deferred income taxes, recorded as a separate component of other comprehensive income (“OCI”).

The historical cost of debt securities is adjusted for amortization of premiums and accretion of discounts over the life of the security, using the level-yield method. Amortization of premium and accretion of discount are included in interest income.

Purchases and sales of securities are recognized on a trade date basis. Realized securities gains or losses are reported in net securities gains (losses) in the consolidated statements of income. The cost of securities sold is based on the specific identification method. We conduct a quarterly assessment of our investment portfolio to determine whether any securities are other-than-temporarily impaired (“OTTI”). When assessing unrealized losses for OTTI, we consider the nature of the investment, the financial condition of the issuer, the extent and duration of unrealized loss, expected cash flows of underlying assets and market conditions. OTTI is considered to have occurred if the security is impaired and (1) if management intends to sell the security; (2) if it is more likely than not we will be required to sell the security before recovery of its amortized cost basis; or (3) if the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. For debt securities that we do not intend to sell or for which it is not more likely than not that the Company will be required to sell prior to recovery, the OTTI is separated into credit and noncredit components. The credit-related OTTI, represented by the expected loss in principal, is recognized in non-interest income, while noncredit-related OTTI is recognized in OCI. Noncredit-related OTTI results from other factors, including increased liquidity spreads and changes in risk-free interest rates. For securities we expect to sell prior to recovery, the entire impairment (i.e., the difference between the amortized cost basis and the fair value) is recognized in earnings.

Federal Home Loan Bank (“FHLB”) Stock – Investments in FHLB stock are restricted as to redemption and are carried at cost.

Loans Held-for-Sale – Loans held-for-sale (“LHFS”) represent mortgage loan originations intended to be sold in the secondary market and other loans that management has an active plan to sell. LHFS are carried at the lower of cost or fair value as determined on an individual asset basis or carried at fair value where the Company has elected fair value accounting. The Company has elected to measure certain residential mortgage loans originated as held-for-sale under the fair value option. Increases or decreases in the fair value of these LHFS are recognized in mortgage banking income in the consolidated statements of income. Mortgage loan origination costs related to LHFS that the Company accounts for under the fair value option are recognized in non-interest expense as incurred. Held-for-investment loans that have been transferred to LHFS are carried at the lower of cost or fair value. For these LHFS, any decreases in value below cost are recognized in other income in the consolidated statements of income and increases in fair value above cost are not recognized until the loans are sold. The credit component of any write down upon transfer to LHFS is reflected in charge-offs to the allowance for loan losses. Loan origination costs for LHFS carried at the lower of cost or fair value are capitalized as part of the carrying amount of the loans.

Gains and losses on the disposition of loans held-for-sale are determined using the specific identification method. Residential mortgage loans sold in the secondary market are sold without retaining servicing rights or other residual interests.

Originated Loans Held-for-Investment – Originated loans held-for-investment are carried at the principal amount outstanding, net of deferred loan fees and costs and any direct principal charge-offs, except for certain residential real estate loans for which the fair value option was elected. These residential real estate loans are measured at fair value as of each reporting date, with changes in fair value recognized in mortgage banking income in the consolidated statements of income. Interest income on loans is accrued based on principal amounts outstanding. Loan origination fees, fees for commitments that are expected to be exercised and certain direct loan origination costs are deferred and the net amount is amortized over the life of the related loan or commitment period as a yield adjustment. Other fees not associated with originating a loan are recognized as fee income when earned.

Delinquent and Nonaccrual Loans – Loans are reported as past due if contractual principal or interest payments are due and unpaid for 30 days or more. All loans that are over 90 days past due in principal or interest are considered “impaired” and placed

91

on nonaccrual status. Management may also place some loans on nonaccrual status before they are 90 days past due if they meet the below definition of “impaired.” When a loan is placed on nonaccrual status, accrued and unpaid interest credited to income is reversed and accretion of net deferred loan fees ceases. Subsequent receipts on nonaccrual loans are recorded as a reduction of principal, and interest income may only be recorded on a cash basis if the remaining recorded investment is deemed fully collectible. Nonaccrual loans are returned to accrual status when all delinquent principal and interest payments become current in accordance with the terms of the loan agreement and the financial position of the borrower and other relevant factors indicate there is no longer doubt as to such collectibility.

Restructured Loans – As part of our ongoing risk management practices and in certain circumstances, we may extend or modify the terms of a loan in an attempt to maximize the collection of amounts due when a borrower is experiencing financial difficulties. These modifications are structured on a loan-by-loan basis, and depending on the circumstances, may consist of reducing the interest rate, extending the maturity dates, reducing the principal balance, or other concession intended to minimize potential losses and maximize our chances of a more successful recovery on a troubled loan. The Company may also utilize a multiple note structure as a workout alternative for certain loans. The multiple note structure typically bifurcates a troubled loan into two separate notes, where the first note is reasonably assured of repayment and performance according to the modified terms, and the portion of the troubled loan that is not reasonably assured of repayment is charged-off. Loans that have been modified to accommodate a borrower who is experiencing financial difficulties, and for which the Company has granted a concession that it would not otherwise consider, are recognized as troubled debt restructurings (“TDRs”).

We consider many factors in determining whether to agree to a loan modification involving concessions, and seek a solution that will both minimize potential loss to the Company and attempt to help the borrower. We evaluate our borrowers’ current and forecasted future cash flows, their ability and willingness to make current contractual or proposed modified payments, the value of the underlying collateral (if applicable), the possibility of obtaining additional securities or guarantees, and the potential costs related to a repossession or foreclosure and the subsequent sale of the collateral.

TDRs may include loans continuing on accrual status, moving to nonaccrual or remaining on nonaccrual, depending on the individual facts and circumstances of the borrower. Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of at least six months to ensure that the borrower performs in accordance with the restructured terms including consistent and timely loan payments. However, the borrower’s performance prior to the restructuring or other significant events at the time of the restructuring may be considered in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status after a shorter performance period or concurrent with the restructuring. In such situations, the loan will be reported as a “restructured loan accruing interest.” If the borrower’s performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan.

Impaired Loans – Impaired loans consist of nonaccrual loans (which include nonaccrual 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; fair value of the underlying collateral less estimated 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.

If the measurement 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 valuation reserve as a component of the allowance for loan losses. Non-TDR impaired loans and nonaccrual TDRs exceeding $500,000 are evaluated individually, while non-TDR impaired loans and nonaccrual TDRs less than $500,000 are evaluated as pools using historical loss experience, as well as management’s loss expectations, for the respective asset class and product type. All accruing TDRs, no matter the balance, are evaluated individually for impairment.

All impaired loans and their related reserves are reviewed and updated each quarter. Any impaired loan for 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 is made.

At the time a collateral-dependent loan is initially determined to be impaired, we review the existing appraisal. If the most recent appraisal is greater than one-year old, a new evaluation of the underlying collateral is obtained. For collateral-dependent impaired loans that are secured by real estate, we generally obtain "as is" appraisal values to evaluate impairment. When a collateral-dependent loan is secured by non-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 workout and/or asset-based specialists for reasonableness of estimated liquidation costs, collectability probabilities, and other market data. Appraisals for real estate collateral-dependent impaired loans in excess of $500,000 are updated with new independent

92

appraisals at least annually and are formally reviewed by our internal appraisal department. Additional diligence is 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 adjusted downward or a new appraisal is required to support the value of the impaired loan. All appraisals and internal reviews are current under this methodology at December 31, 2016.

Allowance for Loan Losses (the “Allowance”) – We maintain an allowance for loan losses at a level management believes is sufficient to absorb credit losses inherent in our loan portfolio at the consolidated statements of financial condition date. The Allowance is assessed quarterly and represents an accounting estimate of probable losses in the portfolio at each statement of financial condition date based on a review of available and relevant information at that time. The Allowance contains reserves for identified probable losses relating to specific borrowing relationships that are considered to be impaired (“the specific allocated component” of the Allowance), and for probable losses inherent in the loan portfolio that have not been specifically identified (“the general allocated component” of the Allowance).

The specific allocated component of the Allowance is the summation of individual reserves related to impaired loans that are analyzed on a loan-by-loan basis at the consolidated statements of financial condition date. Impaired loans consist of nonaccrual loans (which include nonaccrual TDRs) and loans classified as accruing TDRs. See “Impaired Loans” section of this Note 1 for a detailed discussion of the specific allocated component of the Allowance.

The general allocated component of the Allowance is determined using a methodology that is a function of quantitative and qualitative factors and considerations applied to segments of our loan portfolio. Our methodology applies a historical loss model that takes into account at a product level (e.g., commercial, commercial real estate, construction, consumer) the default and loss history of similar products or sub-products using a look-back period that begins in 2010 and is updated with monthly data on a lagged quarter to the most recent period.

Our methodology uses our default and loss history over the look-back period to establish a probability of default (“PD”) for each product type (and, in some cases, sub-segments within a product type) and risk rating, as well as an expected loss given default (“LGD”) for each product type. For our consumer portfolio, we assign a PD to each delinquency period and LGD to collateral position or size of credit. Our methodology applies the PD and LGD to the applicable loan balances and produces a loss estimate by product that is inclusive of the loss emergence period.

We assess the appropriate balance of the general allocated component of the reserve at the model loss emergence period based on a variety of internal and external quantitative and qualitative factors giving consideration to conditions that we believe are not fully reflected in the model-generated loss estimates. Topics considered in this assessment include changes in lending practices and procedures (e.g., underwriting standards) internally and in our industry, changes in business or economic conditions, changes in the nature and volume of loans, changes in staffing or management in our lending teams, changes in the quality of our results from loan reviews (which includes credit quality trends and risk rating accuracy), changes in underlying collateral values, recent portfolio performance, concentration risks, and other external factors such as legal or regulatory matters relevant to management’s assessment of required reserve levels. In certain instances, these additional factors and judgments may lead to management’s conclusion that the appropriate level of the reserve differs from the amount determined through the model-driven quantitative framework, with respect to a given product type. In determining the amount of any qualitative adjustment to be made to the quantitative model output, management may adjust the PD and/or LGD for a product type (or a sub-segment within a product type) to reflect conditions that it does not believe are reflected in historical loss rates and apply those adjusted PDs and LGDs to determine the impact on the model output, with the result used to inform management’s determination of the appropriate qualitative adjustment to be made to the general allocated component for the product type.

The product segments we evaluate in the general allocated component methodology are commercial loans, commercial real estate loans, construction loans and consumer loans (which include personal loans, residential mortgage loans and home equity lines of credit). Our commercial loan portfolio includes lines of credit to businesses and term loans. Certain non-residential owner-occupied commercial real estate loans are also included in our commercial loan portfolio if the cash flows from the owner’s business serve as the primary source of loan repayment. Commercial loans contain risks unique to the business and market of each borrower and the repayment is dependent upon the financial success and viability of the borrower. These risks include, but are not limited to: reliance on sustained cash flow of the borrower to repay the loan and diminutive collateral to take recourse on as a secondary source of repayment for our leveraged loans, dependency on government receivables at the state and federal levels for our healthcare loans, reliance on conversion of assets rather than operating cash flows for our asset-based lending loans, and susceptibility of a slowdown in the manufacturing portfolio as a result of the recent commodity price fluctuations within the manufacturing industry.

Commercial real estate loans comprise loans secured by various types of collateral including one-to-four family non-owner occupied housing units located primarily in our target market areas, multi-family real estate, office buildings, warehouses, retail space,

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mixed use buildings, and vacant land, the bulk of which is held for long-term investment or development. Risks inherent in real estate lending are related to the underlying net operating income, the market value of the property taken as collateral, and the general economic condition of the market in which the collateral is located. Repayment is generally dependent on the ability of the borrower to attract and retain tenants at rental rates that provide for a sufficient level of net operating income to cover debt service, and ultimately the long term financing options of the borrower.

Our construction loan portfolio consists of single-family residential properties, multi-family properties, and commercial projects, and includes both investment properties and properties that will be owner-occupied. Risks inherent in construction lending are similar to those in commercial real estate lending. Additional risks include unexpected cost increases or delays in constructing or improving a property, the borrower’s inability to generate funding until the project is complete, the greater sensitivity to interest rate movements and the real estate market that these borrowers face while a project is being completed or while a borrower is seeking a buyer, and the lack of availability of permanent financing. Construction loans, as a product segment, have the highest inherent risk in our portfolio.

Consumer loans are a smaller portion of our overall portfolio and consist of residential home mortgages, home equity lines of credit and personal loans. The risk issues associated with these products are closely correlated to the U.S. housing market and the local markets in which the collateral resides and include home prices, sales volume, unemployment rates, foreclosure rates, and delinquency rates. Some personal loans may be unsecured and therefore offer little secondary source of repayment.

Determination of the Allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows and collateral appraisal values on impaired loans; estimated losses on pools of homogeneous loans based on historical loss experience, risk ratings, product type, delinquency aging for consumer loans, and consideration of current economic trends and portfolio attributes, all of which may be susceptible to significant change. Default estimates are derived using a monthly rating migration approach over the appropriate look-back period for each segment for the commercial portfolio and delinquency aging for the consumer portfolio, and are estimated consistent with the loss emergence period for a particular product. In addition, we compare current model-derived and historic reserve levels to charge-off trends in considering the appropriate Allowance at each product level.

Credit exposures deemed to be uncollectible are charged-off against the Allowance, while recoveries of amounts previously charged-off are credited to the Allowance. A provision for loan losses, which is a charge against earnings, is recorded to bring the Allowance to a level that, in management’s judgment, is appropriate to absorb probable losses in the loan portfolio as of the consolidated statements of financial condition date.

Reserve for Unfunded Commitments – 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. The reserve is included in other liabilities in the consolidated statements of financial condition. The general reserve is computed using a methodology similar to that used to determine the general allocated component of the Allowance and is based on a model that uses recent commitment utilization patterns at the product level as a method of predicting future usage across the portfolio. The specific reserve is the summation of individual reserves related to unfunded commitments that are analyzed on a commitment-by-commitment basis. Net adjustments to the reserve for unfunded commitments are included in other non-interest expense in the consolidated statements of income.

Purchased Loans – U.S. GAAP requires purchased loans acquired through portfolio purchases or in a business combination (“purchased non-impaired loans”) to be recorded at fair value at the acquisition date and prohibits the “carrying over” or creation of valuation allowances in the initial accounting for loans acquired in a transfer. Differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loan. Decreases in expected cash flows after the purchase date are recognized by recording an allowance for loan losses.

Purchased loans with evidence of credit deterioration at the time of the acquisition and where it is probable that not all contractual payments will be collected are considered purchased credit-impaired loans. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due and nonaccrual status, declines in borrower FICO scores, and declines in loan-to-value ratios.

The fair values for purchased credit-impaired loans are determined by discounting cash flows expected to be collected using an observable discount rate for similar instruments with adjustments to the discount rate that management believes a market participant would consider in determining fair value. We estimate the timing and amount of cash flows expected to be collected at acquisition using internal models that incorporate management’s best estimate of current key assumptions, such as default rates, loss severity and payment speeds.


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Under the applicable accounting guidance for purchased credit-impaired loans, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan using the constant effective yield method when there is a reasonable expectation about the amount and timing of such cash flows. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. Decreases in expected cash flows subsequent to acquisition generally result in an allowance for loan losses. Subsequent increases in cash flows result in a reversal of the allowance for loan losses to the extent previously established or a prospective adjustment to the accretable yield. Purchased credit-impaired loans with common risk characteristics are accounted for on a pool basis 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, they are all considered to be performing.

Covered Assets – Purchased loans and foreclosed loan collateral covered under loss share or similar credit protection agreements with the Federal Deposit Insurance Corporation (“FDIC”) are reported separately on the face of the consolidated statements of financial condition inclusive of the fair value of reimbursement cash flows the Company expects to receive from the FDIC under the agreement. The allowance for covered loan losses is determined without regard to the expected reimbursement from the FDIC with any provision for covered loan loss charges recorded in the consolidated statements of income net of such FDIC reimbursement.

Other Real Estate Owned (“OREO”) – OREO is comprised of property acquired through foreclosure proceedings or acceptance of a deed-in-lieu of foreclosure in partial or total satisfaction of certain loans. Properties are initially recorded at fair value less estimated selling costs. Any write-downs in the carrying value of a property at the time of acquisition are charged against the Allowance. Subsequent to initial recognition, OREO is recorded at the lower of the initial cost basis or current fair value less estimated selling costs. Any subsequent write-downs to reflect current fair value less estimated selling costs are recorded through a valuation allowance. Such write-downs, as well as gains or losses on disposition and revenues and expenses incurred in maintaining such properties, are reported in non-interest expense in the consolidated statements of income.

Depreciable Assets – Premises, leasehold improvements, furniture and equipment, and software on our servers are stated at cost less accumulated depreciation. Depreciation expense is determined by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the life of the asset or the lease term. Rates of depreciation are generally based on the following useful lives: buildings, 30-40 years; leasehold improvements, typically 1-15 years; furniture and equipment, 3-7 years; and software a maximum of 3 years. Gains on dispositions are included in other non-interest income, and losses on dispositions are included in other non-interest expense in the consolidated statements of income. Maintenance and repairs are charged to operating expenses as incurred, while improvements that extend the useful life of assets are capitalized and depreciated over the estimated remaining life.

Long-lived depreciable assets are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the estimated undiscounted future cash flows attributable to a long-lived asset are less than its carrying value. In that event, the Company recognizes a loss equal to the difference between the carrying amount and the estimated fair value of the asset based on a quoted market price, if applicable, or a discounted cash flow analysis. Impairment losses are recorded in other non-interest expense in the consolidated statements of income.

Bank Owned Life Insurance (“BOLI”) – BOLI represents life insurance policies on the lives of certain Company officers or former officers for which the Company is the beneficiary. These policies are recorded as an asset on the consolidated statements of financial condition at their cash surrender values, or the amount that could be realized currently. The change in cash surrender value and insurance proceeds received are recorded as BOLI income in non-interest income in the consolidated statements of income.

Goodwill and Other Intangible Assets – Goodwill represents the excess of purchase price over the fair value of net assets acquired (including identifiable intangible assets) using the acquisition method of accounting. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability.

Goodwill is allocated to reporting units at acquisition. We have determined that our operating segments represent our reporting units under U.S. GAAP, and goodwill is allocated to the Banking and Asset Management reporting units. Subsequent to initial recognition, goodwill is not amortized but, instead, is tested for impairment at the reporting unit level at least annually, or more often if an event occurs or circumstances change that would indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We perform our annual goodwill impairment assessment as of October 31 each year. In the event we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded in earnings. Such a charge would have no impact on tangible or regulatory capital.


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The goodwill impairment testing process is conducted by assigning net assets and goodwill to each reporting unit. In “step one,” the fair value of each reporting unit is compared to the recorded book value. Our step one calculation of each reporting unit’s fair value is based upon a simple average of two metrics: (1) a primary market approach, which measures fair value based upon trading multiples of independent publicly traded financial institutions of comparable size and character to the reporting units, and (2) an income approach, which estimates fair value based upon discounted cash flows and terminal value (using the perpetuity growth method). If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired and “step two” is not considered necessary. If the carrying value of a reporting unit exceeds its fair value, the impairment test continues (“step two”) by comparing the carrying value of the reporting unit’s goodwill to the implied fair value of goodwill. The implied fair value of goodwill is determined using the residual approach, where the fair value of a reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit, calculated in step one, is the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment charge is recognized to the extent the carrying value of goodwill exceeds the implied fair value of goodwill.

The Company has the option at the time of our annual goodwill impairment test to perform a qualitative assessment for each reporting unit to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value before applying the existing two-step goodwill impairment test. If we conclude that this is the case, we would proceed with the existing two-step test, as described above. Otherwise, we would be able to bypass the two-step test and conclude that goodwill is not impaired from a qualitative perspective.

Identified intangible assets that have a finite useful life are amortized over that life in a manner that reflects the estimated decline in the economic value of the identified intangible asset and are subject to impairment testing whenever events or changes in circumstances indicate that the carrying value may not be recoverable. All of the Company’s other intangible assets have finite lives and are amortized over their estimated useful lives with varying periods not exceeding 12 years.

Fiduciary Assets and Assets under Management – Assets held in a fiduciary capacity for clients are not included in the consolidated financial statements as they are not assets of the Company or its subsidiaries. Fiduciary and asset management fees are generally determined based upon market values of assets under management as of a specified date during the period and are included as a component of non-interest income in the consolidated statements of income.

Advertising Costs – All advertising costs are expensed in the period they are incurred.

Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Derivative Instruments – We utilize an overall risk management strategy that incorporates the use of derivative instruments to reduce interest rate risk, as it relates to mortgage loan commitments and planned sales of loans, and foreign currency volatility. We also use these instruments to accommodate our clients as we provide them with risk management solutions, including interest rate and foreign currency contracts. None of the aforementioned end-user and client-related derivatives are designated as hedging instruments.

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.

All derivative instruments are recorded at fair value in the consolidated statements of financial condition, after considering the effects of master netting agreements as allowed under authoritative accounting guidance.

On the date we enter into a derivative contract, we designate the derivative instrument as a fair value hedge, cash flow hedge, or as a freestanding derivative instrument. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of a recognized asset or liability, or of an unrecognized firm commitment, that are attributable to a particular risk, such as interest rate risk, are considered to be fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in the cash flows of a recognized asset or liability, or of a forecasted transaction, that are attributable to a particular risk are considered to be cash flow hedges. We formally document the relationship between all hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking each hedge transaction, at inception of the relationship.

For derivative instruments that are designated and qualify as a fair value hedge and are effective, the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as a cash flow

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hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of OCI. The unrealized gain or loss is reclassified into earnings in the same period the hedged item affects earnings. For all hedge relationships, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized in earnings during the period of change. For derivatives not designated in a hedge relationship, all changes in fair value are reported in current earnings during the period of change.

At the hedge’s inception and at least quarterly thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instruments have been highly effective in offsetting changes in the fair values or cash flows of the hedged item and whether they are expected to be highly effective in the future. If a derivative instrument designated as a hedge is terminated or ceases to be highly effective, hedge accounting is discontinued and the gain or loss is amortized to earnings over the remaining life of the hedged asset or liability (fair value hedge) or over the same period that the forecasted hedged transactions impact earnings (cash flow hedge). However, if the forecasted transaction is not probable of occurring, the gain or loss is included in earnings immediately.

The Company classifies cash flows from derivative instruments designated in a hedge relationship in the same category as the cash flows from the items being hedged as long as the derivatives do not include an other-than-insignificant financing element.

Income Taxes – The Company and its subsidiaries file a consolidated Federal income tax return. The provision for income taxes is based on income reported in the consolidated statements of income, rather than amounts reported on our income tax return.

We recognize a deferred tax asset or liability for the estimated future tax effects attributable to “temporary differences.” Temporary differences include differences between financial statement income and tax return income that are expected to reverse in future periods, as well as differences between the financial reporting and tax bases of assets and liabilities that are also expected to be settled in future periods. Deferred tax assets and liabilities are measured using the enacted tax rates that we expect will apply when the differences are reversed or settled. Changes in corporate income tax rates, if any, would impact the pricing of our deferred tax assets and liabilities in the period of enactment, with any changes in the valuation of deferred tax assets and liabilities reflected as an adjustment to income tax expense. A valuation allowance is recorded to reduce deferred tax assets to the amount management concludes is more likely than not to be realized.

We periodically review and evaluate the status of uncertain tax positions and may establish tax reserves for tax benefits that may not be realized. Any income tax-related interest and penalties are included in income tax expense.

Net Earnings Per Common Share – Basic income per common share is calculated using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared (distributed earnings) and participation rights in undistributed earnings. Distributed and undistributed earnings are allocated between common and participating security stockholders based on their respective rights to receive dividends. Share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities (e.g., the Company’s deferred stock units and certain restricted stock and unit awards). Undistributed net losses are not allocated to holders of participating securities, as they do not have a contractual obligation to fund the losses incurred by the Company. Net income attributable to common shares is then divided by the weighted-average number of common shares outstanding during the period, net of participating securities.

Diluted income per common share considers common stock issuable under the assumed release of unvested restricted stock awards and units and the assumed exercise of stock options granted under the Company’s stock plans (“potentially dilutive common stock equivalents”). The dilutive effect of share-based payment awards that are not deemed to be participating securities is calculated using the treasury stock method, which assumes that the proceeds from exercise are used to purchase common stock at the average market price for the period. The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock method (which assumes that the participating securities are exercised/released) or the two-class method (which assumes that the participating securities are not exercised/released and earnings are reallocated between common and participating security stockholders). Potentially dilutive common stock equivalents are excluded from the computation of diluted earnings per common share in periods in which the effect would be antidilutive.

Treasury Stock – Treasury stock acquired is recorded at cost and is carried as a reduction of equity on the consolidated statements of financial condition.

Share-Based Compensation – Share-based compensation cost is recognized as expense for stock options, restricted stock awards, restricted stock units, and performance share units issued to employees and non-employee directors based on the fair value of these awards at the date of grant. A binomial option-pricing model is utilized to estimate the fair value of stock options, while the closing market price of the Company’s common stock at the date of grant is used for restricted stock awards, restricted stock units

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and performance share units (“full value awards”). To the extent full value awards are subject to post-vesting transferability restrictions, a discount for lack of marketability may be applied to the grant date fair value. Additionally, the grant date fair value of full value awards is adjusted to reflect any market conditions that affect vesting of the awards. The costs are recognized ratably on a straight-line basis over the requisite service period, generally defined as the vesting period for the awards. For performance share units, an estimate is made as to the number of shares expected to vest as a result of actual performance against the performance criteria to determine the amount of compensation expense to be recognized. The estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period. When an award is granted to an employee who is retirement eligible or who will become retirement eligible prior to the end of the service period and will continue to vest after retirement, the compensation cost of these awards is recognized over the period up to the date an employee first becomes eligible to retire. The amortization of share-based compensation generally reflects estimated forfeitures adjusted for actual forfeiture experience. As compensation expense is recognized, a deferred tax asset is recorded that represents an estimate of the future tax deduction from exercise or release of restrictions. At the time share-based awards expire, are exercised or canceled, or as restrictions are released, we may be required to recognize an adjustment to income tax expense, depending on the market price of the Company’s stock at that time and the amount of the deferred tax asset relating to such awards. Share-based compensation expense is included in “salaries and wages” in the consolidated statements of income.

Comprehensive Income – Comprehensive income consists of two components, reported net income and OCI. OCI refers to revenue, expenses, gains, and losses that are recorded as an element of equity but are excluded from reported net income. OCI consists of unrealized gains (losses) on securities available-for-sale and changes in the fair value of derivative instruments designated as cash flow hedges, net of tax.

Segment Disclosures – An operating segment is a component of a business that (i) engages in business activities from which it may earn revenues and incur expenses; (ii) has operating results that are reviewed regularly by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and (iii) has discrete financial information available. Our chief operating decision maker evaluates the operations of the Company under three operating segments: Banking, Asset Management, and Holding Company.

Variable Interest Entities – A variable interest entity (“VIE”) is a partnership, limited liability company, trust, or other legal entity that does not have sufficient equity to permit it to finance its activities without additional subordinated financial support from other parties, or whose investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics are: (i) the power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance, (ii) the obligation to absorb the expected losses of the entity; and (iii) the right to receive the expected residual returns of the entity.

U.S. GAAP requires VIEs to be consolidated by the party that has a controlling financial interest in the VIE (i.e., the primary beneficiary). The Company is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could Be Achieved after the Requisite Service Period - On January 1, 2016, we adopted new accounting guidance issued by the Financial Accounting Standards Board (“FASB”) 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 is applied prospectively to awards that are granted or modified after the effective date. The adoption of this guidance did not impact our consolidated financial position or consolidated results of operations.

Amendments to the Consolidation Analysis - On January 1, 2016, we adopted new accounting guidance issued by the FASB that changes certain aspects of the variable interest and voting interest consolidation models. The amendments modify existing guidance on (1) the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, (2) when fee arrangements represent variable interests in a VIE, and (3) the primary beneficiary determination for VIEs. Additionally, the guidance eliminates the presumption that a general partner controls a limited partnership

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under the voting interest model and exempts reporting entities from consolidating money market funds that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940. The Company elected to apply the guidance through a cumulative effect adjustment as of January 1, 2016. The adoption of this guidance did not impact our consolidated financial position or consolidated results of operations.

Debt Issuance Costs - On January 1, 2016, we adopted new accounting guidance issued by the FASB that clarifies the presentation of debt issuance costs within the balance sheet. This guidance requires that an entity present debt issuance costs related to a recognized debt liability on the balance sheet as a direct deduction from the carrying amount of that debt liability, not as a separate asset. The standard does not affect the current guidance for the recognition and measurement for debt issuance costs. This guidance was applied retrospectively. The adoption of this guidance did not materially impact our consolidated financial position or consolidated results of operations.

Improvements to Employee Share-Based Payment Accounting - In March 2016, the FASB issued guidance that amends certain aspects of share-based payment accounting. The new guidance (1) requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, and eliminates the accounting for additional paid-in-capital pools; (2) allows the Company to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting; (3) requires the Company to make an accounting policy election to either recognize forfeitures as they occur or estimate the number of awards expected to be forfeited; (4) requires the Company to present excess tax benefits as an operating activity on the statement of cash flows; and (5) clarifies that the Company must classify cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Regarding the accounting policy election related to the accounting for forfeitures, the Company has elected to estimate the number of awards expected to be forfeited, consistent with our past practice of estimating forfeitures. As permitted under the new guidance, the Company has elected to early adopt the guidance for the Company’s financial statements that include periods beginning on January 1, 2016. The Company has applied the guidance related to items (1) and (4) prospectively; the guidance related to item (5) retrospectively; and the guidance related to items (2) and (3) using a modified retrospective transition method with a cumulative-effect adjustment to retained earnings. For the year ended December 31, 2016, the Company recognized a $3.7 million tax benefit in the consolidated statements of income within the income tax provision, representing the prospective application of the accounting change described in (1) above. Adoption of all other changes did not have an impact on our consolidated 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 doubt about an entity’s ability to continue as a going concern. The guidance was effective for the Company’s annual financial statements dated December 31, 2016. The adoption of this guidance did not impact our financial position or consolidated results of operations.

Accounting Pronouncements Pending Adoption

Revenue from Contracts with Customers - In May 2014, August 2015, March 2016, April 2016, May 2016 and December 2016, the FASB issued new revenue recognition guidance 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 is effective for the Company’s financial statements beginning January 1, 2018. The guidance allows an entity to apply the new standard either retrospectively or through a cumulative effect adjustment as of January 1, 2018. We have elected to implement this new accounting guidance using a cumulative-effect adjustment. This guidance does not apply to revenue associated with financial instruments, including loans, securities, and derivatives that are accounted for under other U.S. GAAP guidance. For that reason, we do not expect it to have a material impact on our consolidated results of operations for elements of the statement of income associated with financial instruments, including securities gains, interest income and interest expense. However, we do believe the new standard will result in new disclosure requirements. We are currently in the process of reviewing contracts to assess the impact of the new guidance on our service offerings that are in the scope of the guidance, including Treasury Management and Asset Management services. The Company is continuing to evaluate the effect of the new guidance on revenue sources other than financial instruments on our financial position and consolidated results of operations.


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Recognition and Measurement of Financial Assets and Financial Liabilities - In January 2016, the FASB issued guidance that amends the accounting for certain financial asset and financial liabilities. The guidance will require the Company to (1) measure certain equity investments at fair value with changes in fair value recognized in earnings, (2) record changes in instrument-specific credit risk for financial liabilities measured under the fair value option in other comprehensive income, and (3) assess the realizability of deferred tax assets related to available-for-sale debt securities in combination with the Company’s other deferred tax assets. The standard does not change the guidance for classifying and measuring investments in debt securities and loans. The guidance amends certain disclosure requirements related to financial assets and financial liabilities. The guidance is effective for the Company’s financial statements that include periods beginning January 1, 2018. Certain provisions of the standard will be applied through a cumulative-effect adjustment as of January 1, 2018, and other provisions will be applied prospectively. The Company is in the process of determining the effect of the new guidance on our financial position and consolidated results of operations.

Leases - In February 2016, the FASB issued guidance that amends the accounting for leases. Under the new guidance, lessees will need to recognize a right-of-use asset and a lease liability for the vast majority of leases. Operating leases will result in straight-line expense, while finance leases will result in a front-loaded expense pattern. Classification will be based on criteria that are largely similar to those applied in current lease accounting. Lessor accounting will remain similar to the current model. Lessors will classify leases as operating, direct financing, or sales-type, consistent with the current model. The new guidance will also require extensive quantitative and qualitative disclosures related to the revenue and expense recognized and expected to be recognized over the lease term, as well as significant judgments made by management. The guidance is effective for the Company’s financial statements that include periods beginning January 1, 2019, and early adoption is permitted. The new standard must be applied using a modified retrospective transition. The Company is in the process of determining the effect of the new guidance on our financial position and consolidated results of operations.

Measurement of Credit Losses on Financial Instruments - In June 2016, the FASB issued guidance that changes the impairment model for most financial assets and certain other instruments that are not measured at fair value through net income. For financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures (including loans, held-to-maturity debt securities, and loan commitments), the new guidance will require the Company to record an allowance based on the estimated credit losses expected over the life of the financial instrument or pool of financial instruments. The estimate of lifetime expected credit losses must consider historical information, current conditions, and reasonable and supportable forecasts. The new guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities. The new guidance will require the Company to record an allowance for estimated credit losses on available-for-sale securities when the fair value of the security is below the amortized cost of the asset. Additionally, the guidance expands the disclosure requirements related to the Company’s assumptions, models, and methods for estimating the allowance for credit losses. The guidance is effective for the Company’s financial statements that include periods beginning January 1, 2020. Early adoption is permitted beginning January 1, 2019. The new standard will be applied using a modified retrospective approach. The Company is in the process of determining the effect of the new guidance on our financial position and consolidated results of operations.

Classification of Certain Cash Receipts and Cash Payments - In August 2016, the FASB issued guidance that clarifies how certain cash receipts and cash payments are presented and classified in the consolidated statements of cash flows. The guidance is effective for the Company’s financial statements that include periods beginning January 1, 2018, as well as interim periods thereafter, with early adoption permitted. The guidance will be applied using a retrospective transition method. The Company is in the process of determining the effect of the new guidance on our financial position and consolidated results of operations.

Intra-Entity Transfers of Assets Other Than Inventory - In October 2016, the FASB issued guidance that will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This eliminates the current exception for all intra-entity transfers of an asset other than inventory that requires deferral of the tax effects until the asset is sold to a third party or otherwise recovered through use. The guidance is effective for the Company’s financial statements that include periods beginning after January 1, 2018, as well as periods thereafter. Early adoption is permitted. The guidance will be applied using a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is in the process of determining the effect of the new guidance on our financial position and consolidated results of operations.

Interests Held through Related Parties that are Under Common Control - In October 2016, the FASB issued guidance that alters how a decision maker considers indirect interests in a VIE held through an entity under common control. Under the new ASU, if a decision maker is required to evaluate whether it is the primary beneficiary of a VIE, it will need to consider only its proportionate indirect interest in the VIE held through a common control party. The guidance is effective for the Company’s financial statements that include periods beginning January 1, 2017, 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.


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Restricted Cash - In November 2016, the FASB issued clarifying guidance that requires that the statement of cash flows include restricted cash in the beginning and end-of-period total amounts and that the statement of cash flows explain changes in restricted cash during the period. The guidance is effective for the Company’s financial statements that include periods beginning January 1, 2018, as well as interim periods thereafter. Early adoption is permitted. The amendments will be applied using a retrospective transition method. The Company is in the process of determining the effect of the new guidance on our financial position and consolidated results of operations.

3. SECURITIES

Securities Portfolio
(Amounts in thousands)
 
 
December 31,
 
2016
 
2015
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Gains
 
Losses
 
Gains
 
Losses
 
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
548,894

 
$
351

 
$
(6,950
)
 
$
542,295

 
$
322,922

 
$
30

 
$
(1,301
)
 
$
321,651

U.S. Agencies
46,043

 
—

 
(103
)
 
45,940

 
46,504

 
—

 
(406
)
 
46,098

Collateralized mortgage obligations
73,228

 
2,167

 
(50
)
 
75,345

 
97,260

 
2,784

 
(72
)
 
99,972

Residential mortgage-backed securities
884,176

 
10,741

 
(8,367
)
 
886,550

 
817,006

 
15,870

 
(3,021
)
 
829,855

State and municipal securities
466,651

 
2,630

 
(5,886
)
 
463,395

 
458,402

 
9,779

 
(391
)
 
467,790

Total
$
2,018,992

 
$
15,889

 
$
(21,356
)
 
$
2,013,525

 
$
1,742,094

 
$
28,463

 
$
(5,191
)
 
$
1,765,366

Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
40,568

 
$
—

 
$
(1,295
)
 
$
39,273

 
$
50,708

 
$
—

 
$
(1,729
)
 
$
48,979

Residential mortgage-backed securities
1,378,610

 
2,529

 
(20,218
)
 
1,360,921

 
1,069,746

 
4,809

 
(4,983
)
 
1,069,572

Commercial mortgage-backed securities
314,622

 
692

 
(5,153
)
 
310,161

 
229,722

 
499

 
(2,158
)
 
228,063

State and municipal securities
204

 
—

 
—

 
204

 
254

 
—

 
—

 
254

Foreign sovereign debt
500

 
—

 
—

 
500

 
500

 
—

 
—

 
500

Other securities
3,619

 
92

 
—

 
3,711

 
4,353

 
—

 
(480
)
 
3,873

Total
$
1,738,123

 
$
3,313

 
$
(26,666
)
 
$
1,714,770

 
$
1,355,283

 
$
5,308

 
$
(9,350
)
 
$
1,351,241


The carrying value of securities pledged to secure public deposits, FHLB advances, trust deposits, Federal Reserve Bank (“FRB”) discount window borrowing availability, derivative transactions, and standby letters of credit with counterparty banks and for other purposes as permitted or required by law, totaled $351.4 million and $421.9 million at December 31, 2016 and 2015, 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 $86.7 million and $100.2 million at December 31, 2016 and 2015, 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 December 31, 2016 or 2015.


101

The following table presents the fair values of securities with unrealized losses as of December 31, 2016 and 2015. 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
 
Number of Securities
 
Fair
Value
 
Unrealized
Losses
 
Number of Securities
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
As of December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
14

 
$
341,497

 
$
(6,950
)
 
—

 
$
—

 
$
—

 
$
341,497

 
$
(6,950
)
U.S. Agency
3

 
45,940

 
(103
)
 
—

 
—

 
—

 
45,940

 
(103
)
Collateralized mortgage obligations
4

 
4,438

 
(50
)
 
—

 
—

 
—

 
4,438

 
(50
)
Residential mortgage-backed securities
51

 
535,001

 
(8,367
)
 
—

 
—

 
—

 
535,001

 
(8,367
)
State and municipal securities
686

 
309,958

 
(5,764
)
 
5

 
2,462

 
(122
)
 
312,420

 
(5,886
)
Total
 
 
$
1,236,834

 
$
(21,234
)
 
 
 
$
2,462

 
$
(122
)
 
$
1,239,296

 
$
(21,356
)
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
1

 
$
9,261

 
$
(224
)
 
3

 
$
30,012

 
$
(1,071
)
 
$
39,273

 
$
(1,295
)
Residential mortgage-backed securities
92

 
1,023,841

 
(19,816
)
 
4

 
13,036

 
(402
)
 
1,036,877

 
(20,218
)
Commercial mortgage-backed securities
56

 
207,235

 
(5,063
)
 
1

 
3,361

 
(90
)
 
210,596

 
(5,153
)
Total
 
 
$
1,240,337

 
$
(25,103
)
 
 
 
$
46,409

 
$
(1,563
)
 
$
1,286,746

 
$
(26,666
)
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
11

 
$
271,006

 
$
(1,081
)
 
1

 
$
25,773

 
$
(220
)
 
$
296,779

 
$
(1,301
)
U.S. Agency
3

 
46,098

 
(406
)
 
—

 
—

 
—

 
46,098

 
(406
)
Collateralized mortgage obligations
6

 
7,528

 
(72
)
 
—

 
—

 
—

 
7,528

 
(72
)
Residential mortgage-backed securities
28

 
243,862

 
(1,148
)
 
5

 
75,533

 
(1,873
)
 
319,395

 
(3,021
)
State and municipal securities
95

 
48,974

 
(353
)
 
12

 
3,485

 
(38
)
 
52,459

 
(391
)
Total


 
$
617,468

 
$
(3,060
)
 
 
 
$
104,791

 
$
(2,131
)
 
$
722,259

 
$
(5,191
)
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
—

 
$
—

 
$
—

 
4

 
$
48,979

 
$
(1,729
)
 
$
48,979

 
$
(1,729
)
Residential mortgage-backed securities
48

 
512,395

 
(3,680
)
 
10

 
57,340

 
(1,303
)
 
569,735

 
(4,983
)
Commercial mortgage-backed securities
35

 
128,434

 
(1,502
)
 
12

 
37,350

 
(656
)
 
165,784

 
(2,158
)
Other securities
1

 
3,873

 
(480
)
 
—

 
—

 
—

 
3,873

 
(480
)
Total
 
 
$
644,702

 
$
(5,662
)
 
 
 
$
143,669

 
$
(3,688
)
 
$
788,371

 
$
(9,350
)

There were $48.9 million of securities with $1.7 million in an unrealized loss position for greater than 12 months at December 31, 2016. At December 31, 2015, there were $248.5 million of securities with $5.8 million in an unrealized loss position greater than

102

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.

We conduct a quarterly assessment of our investment portfolio to determine whether any securities are OTTI. During the year ended December 31, 2015, we identified three municipal debt securities from the same issuer totaling $1.1 million, which had credit rating downgrades during the period. We determined that the difference between amortized cost and fair value was other-than-temporary and, accordingly, recognized the $466,000 difference as a component of net securities gains in the consolidated statements of income. The securities were sold in January 2016 with no further losses recognized.

The following table presents the remaining contractual maturity of securities as of December 31, 2016 by amortized cost and fair value.

Remaining Contractual Maturity of Securities
(Amounts in thousands)
 
 
December 31, 2016
 
Available-For-Sale Securities
 
Held-To-Maturity Securities
 
Amortized Cost
 
Fair
Value
 
Amortized Cost
 
Fair
Value
U.S. Treasury, U.S. Agencies, state and municipal and foreign sovereign debt securities:
 
 
 
 
 
 
 
One year or less
$
74,077

 
$
74,204

 
$
204

 
$
204

One year to five years
511,883

 
512,651

 
500

 
500

Five years to ten years
437,275

 
427,918

 
3,619

 
3,711

After ten years
38,353

 
36,857

 
—

 
—

All other securities:
 
 
 
 
 
 
 
Collateralized mortgage obligations
73,228

 
75,345

 
40,568

 
39,273

Residential mortgage-backed securities
884,176

 
886,550

 
1,378,610

 
1,360,921

Commercial mortgage-backed securities
—

 
—

 
314,622

 
310,161

Total
$
2,018,992

 
$
2,013,525

 
$
1,738,123

 
$
1,714,770


The following table presents gains (losses) on securities for the three years ended December 31, 2016, 2015, and 2014.

Securities Gains (Losses)
(Amounts in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Proceeds from sales
$
45,446

 
$
90,777

 
$
74,690

Gross realized gains
$
1,133

 
$
1,322

 
$
615

Gross realized losses (1)
(22
)
 
(500
)
 
(85
)
Net realized gains
$
1,111

 
$
822

 
$
530

Income tax provision on net realized gains
$
428

 
$
318

 
$
209

(1) 
Includes OTTI of $466,000 for the year ended December 31, 2015, and is reported in the consolidated statements of income and cash flows within net securities gains.

Refer to Note 12 for additional details of the securities available-for-sale portfolio and the related impact of unrealized gains (losses) on other comprehensive income.


103

All non-marketable Community Reinvestment Act (“CRA”) qualified investments, totaling $59.0 million and $54.2 million at December 31, 2016 and 2015, respectively, are recorded in other assets on the consolidated statements of financial condition. There has been no impairment recorded as of December 31, 2016, 2015 or 2014.

4. LOANS AND CREDIT QUALITY

The following loan portfolio and credit quality disclosures exclude covered loans. Covered loans represent loans acquired through a FDIC-assisted acquisition that are subject to a loss share agreement and are presented separately in the consolidated statements of financial condition. Refer to the “Covered Assets” section in this footnote for further information regarding covered loans.

Loan Portfolio
(Amounts in thousands)
 
 
December 31,
 
2016
 
2015
Commercial and industrial
$
7,506,977

 
$
6,747,389

Commercial – owner-occupied commercial real estate
2,142,068

 
1,888,238

Total commercial
9,649,045

 
8,635,627

Commercial real estate
3,127,373

 
2,629,873

Commercial real estate – multi-family
993,352

 
722,637

Total commercial real estate
4,120,725

 
3,352,510

Construction
417,955

 
522,263

Residential real estate
581,757

 
461,412

Home equity
119,049

 
129,317

Personal
167,710

 
165,346

Total loans
$
15,056,241

 
$
13,266,475

Net deferred loan fees and unamortized discount and premium on loans, included as a reduction in total loans
$
45,220

 
$
48,009

Overdrawn demand deposits included in total loans
$
2,160

 
$
2,654


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)
 
 
December 31,
 
2016
 
2015
Mortgage loans held-for-sale (1)
$
24,934

 
$
35,704

Other loans held-for-sale (2)
78,350

 
73,094

Total loans held-for-sale
$
103,284

 
$
108,798

(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 20 for additional information regarding mortgage loans held-for-sale.
(2) 
Amounts represent commercial, commercial real estate, construction and residential loans carried at the lower of aggregate cost or fair value, including one nonaccrual loan totaling $667,000 at December 31, 2015. Generally, the Company intends to sell these loans within 30-60 days from the date the intent to sell was established.


104

Carrying Value of Loans Pledged
(Amounts in thousands)
 
 
December 31,
 
2016
 
2015
Loans pledged to secure outstanding borrowings or availability:
 
 
 
FRB discount window borrowings (1)
$
818,116

 
$
440,023

FHLB advances (2)
3,855,892

 
4,133,942

Total
$
4,674,008

 
$
4,573,965

(1) 
No borrowings were outstanding at December 31, 2016 or 2015.
(2) 
Refer to Notes 9 and 10 for additional information regarding FHLB advances.

Related Party Loans

Some of our directors, and certain business entities for which they serve as an executive officer and/or in which they directly or indirectly own 10% or more of the equity, are or have been in the past, lending clients of the Bank. Additionally, two of our executive officers each had an immediate family member who had a small balance loan outstanding as of year end 2015 and 2016. Loans made to these individuals and their affiliated entities were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than the normal risk of collectability. Such loans, in the aggregate, totaled $37.4 million and $39.4 million at December 31, 2016 and 2015, respectively, and were not greater than 5% of stockholders' equity.

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 December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
9,572,607

 
$
6,889

 
$
96

 
$
—

 
$
9,579,592

 
$
69,453

 
$
9,649,045

Commercial real estate
4,114,409

 
—

 
—

 
—

 
4,114,409

 
6,316

 
4,120,725

Construction
417,955

 
—

 
—

 
—

 
417,955

 
—

 
417,955

Residential real estate
573,667

 
2,859

 
640

 
—

 
577,166

 
4,591

 
581,757

Home equity
115,652

 
80

 
—

 
—

 
115,732

 
3,317

 
119,049

Personal
167,675

 
19

 
5

 
—

 
167,699

 
11

 
167,710

Total loans
$
14,961,965

 
$
9,847

 
$
741

 
$
—

 
$
14,972,553

 
$
83,688

 
$
15,056,241

As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
8,595,150

 
$
6,641

 
$
1,042

 
$
—

 
$
8,602,833

 
$
32,794

 
$
8,635,627

Commercial real estate
3,343,714

 
—

 
295

 
—

 
3,344,009

 
8,501

 
3,352,510

Construction
522,263

 
—

 
—

 
—

 
522,263

 
—

 
522,263

Residential real estate
455,764

 
613

 
273

 
—

 
456,650

 
4,762

 
461,412

Home equity
121,580

 
66

 
—

 
—

 
121,646

 
7,671

 
129,317

Personal
165,188

 
132

 
5

 
—

 
165,325

 
21

 
165,346

Total loans
$
13,203,659

 
$
7,452

 
$
1,615

 
$
—

 
$
13,212,726

 
$
53,749

 
$
13,266,475


Impaired Loans

Impaired loans consist of nonaccrual loans (which include nonaccrual 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

105

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.

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 December 31, 2016
 
 
 
 
 
 
 
 
 
Commercial
$
141,415

 
$
104,408

 
$
28,756

 
$
133,164

 
$
10,930

Commercial real estate
6,316

 
5,169

 
1,147

 
6,316

 
223

Residential real estate
4,708

 
—

 
4,591

 
4,591

 
406

Home equity
5,740

 
2,291

 
3,317

 
5,608

 
376

Personal
11

 
—

 
11

 
11

 
3

Total impaired loans
$
158,190

 
$
111,868

 
$
37,822

 
$
149,690

 
$
11,938

As of December 31, 2015
 
 
 
 
 
 
 
 
 
Commercial
$
49,912

 
$
27,300

 
$
20,020

 
$
47,320

 
$
4,458

Commercial real estate
14,150

 
2,085

 
6,416

 
8,501

 
1,156

Residential real estate
4,950

 
—

 
4,762

 
4,762

 
539

Home equity
10,071

 
2,626

 
7,065

 
9,691

 
1,106

Personal
21

 
—

 
21

 
21

 
3

Total impaired loans
$
79,104

 
$
32,011

 
$
38,284

 
$
70,295

 
$
7,262


Average Recorded Investment and Interest Income Recognized on Impaired Loans (1) 
(Amounts in thousands)
 
 
2016
 
2015
 
Average Recorded Investment
 
Interest Income
Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Commercial
$
89,565

 
$
2,734

 
$
52,489

 
$
968

Commercial real estate
9,330

 
—

 
14,269

 
13

Construction
33

 
1

 
171

 
—

Residential real estate
4,179

 
—

 
4,584

 
—

Home equity
7,551

 
122

 
12,012

 
107

Personal
24

 
—

 
173

 
—

Total
$
110,682

 
$
2,857

 
$
83,698

 
$
1,088

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

Credit Quality Indicators

We attempt to mitigate risk through loan structure, collateral, monitoring, and other credit risk management controls. We have adopted an internal risk rating policy under 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 considered “pass” rated credits that we believe exhibit acceptable financial

106

performance, cash flow, and leverage. Credits rated 6 are performing in accordance with contractual terms, but are considered “special mention” as they demonstrate potential weakness that, if left unresolved, may result in deterioration in our 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. Potential problem loans continue to accrue interest, but the ultimate collection of these loans in full is a risk 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 a declining 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 we 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 December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
173,626

 
1.8
 
 
$
114,090

 
1.2
 
 
$
69,453

 
0.7
 
 
$
9,649,045

Commercial real estate
 
—

 
—
 
 
4,632

 
0.1
 
 
6,316

 
0.2
 
 
4,120,725

Construction
 
—

 
—
 
 
—

 
—
 
 
—

 
—
 
 
417,955

Residential real estate
 
5,449

 
0.9
 
 
3,829

 
0.7
 
 
4,591

 
0.8
 
 
581,757

Home equity
 
508

 
0.4
 
 
733

 
0.6
 
 
3,317

 
2.8
 
 
119,049

Personal
 
28

 
*
 
 
61

 
*
 
 
11

 
*
 
 
167,710

Total
 
$
179,611

 
1.2
 
 
$
123,345

 
0.8
 
 
$
83,688

 
0.6
 
 
$
15,056,241

As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
85,217

 
1.0
 
 
$
124,654

 
1.4
 
 
$
32,794

 
0.4
 
 
$
8,635,627

Commercial real estate
 
27,580

 
0.8
 
 
121

 
*
 
 
8,501

 
0.3
 
 
3,352,510

Construction
 
—

 
—
 
 
—

 
—
 
 
—

 
—
 
 
522,263

Residential real estate
 
5,988

 
1.3
 
 
5,031

 
1.1
 
 
4,762

 
1.0
 
 
461,412

Home equity
 
623

 
0.5
 
 
2,451

 
1.9
 
 
7,671

 
5.9
 
 
129,317

Personal
 
620

 
0.4
 
 
141

 
0.1
 
 
21

 
*
 
 
165,346

Total
 
$
120,028

 
0.9
 
 
$
132,398

 
1.0
 
 
$
53,749

 
0.4
 
 
$
13,266,475

*
Less than 0.1%


107

Troubled Debt Restructured Loans
Troubled Debt Restructured Loans Outstanding
(Amounts in thousands)
 
 
December 31,
 
2016
 
2015
 
Accruing
 
Nonaccrual (1)
 
Accruing
 
Nonaccrual (1)
Commercial
$
63,711

 
$
33,141

 
$
14,526

 
$
25,034

Commercial real estate
—

 
5,857

 
—

 
7,619

Residential real estate
—

 
1,534

 
—

 
1,341

Home equity
2,291

 
3,081

 
2,020

 
5,177

Total
$
66,002

 
$
43,613

 
$
16,546

 
$
39,171

(1) 
Included in nonperforming loans.

At December 31, 2016 and 2015, credit commitments to lend additional funds to debtors whose loan terms have been modified in a TDR (both accruing and nonaccruing) totaled $13.4 million and $9.7 million, respectively. The following table presents the type of modification for loans that have been restructured and the post-modification recorded investment during the years ended December 31, 2016 and 2015.

Additions to Troubled Debt Restructurings During the Year
(Dollars in thousands)
 
 
Year Ended December 31, 2016
 
Extension of Maturity Date (1)
 
Other Concession (2)
 
Total
 
Number of Loans
 
Balance
 
Number of Loans
 
Balance
 
Number of Loans
 
Balance
Accruing:
 
 
 
 
 
 
 
 
 
 
 
Commercial
8

 
$
7,223

 
10

 
$
70,384

 
18

 
$
77,607

Home equity
—

 
—

 
2

 
538

 
2

 
538

Nonaccruing:
 
 
 
 
 
 
 
 
 
 
 
Commercial
4

 
792

 
7

 
14,540

 
11

 
15,332

Commercial real estate
1

 
77

 
1

 
691

 
2

 
768

Residential real estate
—

 
—

 
5

 
550

 
5

 
550

Home equity
—

 
—

 
3

 
146

 
3

 
146

Total accruing and nonaccruing additions
13

 
$
8,092

 
28

 
$
86,849

 
41

 
$
94,941

Change in recorded investment due to principal paydown or charge-off at time of modification, net of advances
 
 
 
 
 
 
 
 
 
 
$
3,527

(1) 
Extension of maturity date also includes loans renewed at an existing rate of interest that is considered a below market rate for that particular loan’s risk profile.
(2) 
Other concessions primarily include interest rate reductions, loan increases or deferrals of principal.


108

Additions to Troubled Debt Restructurings During the Year (Continued)
(Dollars in thousands)
 
 
Year Ended December 31, 2015
 
Extension of Maturity Date (1)
 
Other Concession (2)
 
Total
 
Number of Loans
 
Balance
 
Number of Loans
 
Balance
 
Number of Loans
 
Balance
Accruing:
 
 
 
 
 
 
 
 
 
 
 
Commercial
9

 
$
27,656

 
—

 
$
—

 
9

 
$
27,656

Home equity
1

 
346

 
—

 
—

 
1

 
346

Nonaccruing:
 
 
 
 
 
 
 
 
 
 
 
Commercial
6

 
19,899

 
3

 
7,246

 
9

 
27,145

Commercial real estate
2

 
1,660

 
1

 
3,773

 
3

 
5,433

Residential real estate
—

 
—

 
1

 
49

 
1

 
49

Home equity
4

 
224

 
5

 
513

 
9

 
737

Total accruing and nonaccruing additions
22

 
$
49,785

 
10

 
$
11,581

 
32

 
$
61,366

Change in recorded investment due to principal paydown or charge-off at time of modification, net of advances
 
 
 
 
 
 
 
 
 
 
$
395

(1) 
Extension of maturity date also includes loans renewed at an existing rate of interest that is considered a below market rate for that particular loan’s risk profile.
(2) 
Other concessions primarily include interest rate reductions, loan increases or deferrals of principal.

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 regarding our policy for assessing potential impairment on such loans. Our allowance for loan losses included $1.6 million and $3.9 million in specific reserves for nonaccrual TDRs at December 31, 2016 and 2015, respectively.

During the year ended December 31, 2016, two commercial loans totaling $8.0 million and one home equity loan totaling $187,000 became nonperforming within 12 months of being modified as an accruing TDR. During the year ended December 31, 2015, a single commercial real estate loan totaling $175,000 became nonperforming within 12 months of being modified as an accruing TDR. A loan typically becomes nonperforming and placed on nonaccrual status 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 the 90-day past due date.


109

Other Real Estate Owned

The following table presents the composition of property acquired as a result of borrower defaults on loans secured by real property.

OREO Composition
(Amounts in thousands)
 
 
December 31,
 
2016
 
2015
Single-family homes
$
186

 
$
1,878

Land parcels
1,070

 
1,760

Multi-family
—

 
598

Office/industrial
1,003

 
1,779

Retail
7,944

 
1,258

Total OREO properties
$
10,203

 
$
7,273


The recorded investment in consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process totaled $1.4 million at December 31, 2016, and $3.0 million at December 31, 2015.

Covered Assets

Covered assets represent acquired residential mortgage loans and foreclosed real estate covered under a loss share 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 will expire on September 30, 2019. The carrying amount of covered assets is presented in the following table.

Covered Assets
(Amounts in thousands)
 
 
December 31,
 
2016
 
2015
Residential mortgage loans (1)
$
20,347

 
$
24,717

Foreclosed real estate - single-family homes
777

 
530

Estimated loss reimbursement by the FDIC
939

 
1,707

Total covered assets
22,063

 
26,954

Allowance for covered loan losses
(4,766
)
 
(5,712
)
Net covered assets
$
17,297

 
$
21,242

(1) 
Includes $203,000 and $257,000 of purchased credit-impaired loans as of December 31, 2016 and December 31, 2015, respectively.

The recorded investment in residential mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process totaled $194,000 and $775,000 at December 31, 2016 and December 31, 2015, respectively.


110

5. ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED COMMITMENTS

The following allowance and credit quality disclosures exclude covered loans. Refer to Note 4 for a discussion regarding covered loans.

Allowance for Loan Losses and Recorded Investment in Loans
(Amounts in thousands)
 
 
Year Ended December 31, 2016
 
Commercial 
 
 Commercial
Real
Estate
 
Construction 
 
Residential
Real
Estate
 
Home
Equity
 
Personal
 
Total
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
$
117,619

 
$
27,610

 
$
5,441

 
$
4,239

 
$
3,744

 
$
2,083

 
$
160,736

Loans charged-off
(8,427
)
 
(1,510
)
 
—

 
(859
)
 
(226
)
 
(225
)
 
(11,247
)
Recoveries on loans previously charged-off
1,082

 
795

 
119

 
99

 
165

 
62

 
2,322

Net (charge-offs) recoveries
(7,345
)
 
(715
)
 
119

 
(760
)
 
(61
)
 
(163
)
 
(8,925
)
Provision (release) for loan losses
30,773

 
3,731

 
527

 
255

 
(1,383
)
 
51

 
33,954

Balance at end of year
$
141,047

 
$
30,626

 
$
6,087

 
$
3,734

 
$
2,300

 
$
1,971

 
$
185,765

Ending balance, loans individually evaluated for impairment (1)
$
10,930

 
$
223

 
$
—

 
$
406

 
$
376

 
$
3

 
$
11,938

Ending balance, loans collectively evaluated for impairment
$
130,117

 
$
30,403

 
$
6,087

 
$
3,328

 
$
1,924

 
$
1,968

 
$
173,827

Recorded Investment in Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance, loans individually evaluated for impairment (1)
$
133,164

 
$
6,316

 
$
—

 
$
4,591

 
$
5,608

 
$
11

 
$
149,690

Ending balance, loans collectively evaluated for impairment
9,515,881

 
4,114,409

 
417,955

 
577,166

 
113,441

 
167,699

 
14,906,551

Total recorded investment in loans
$
9,649,045

 
$
4,120,725

 
$
417,955

 
$
581,757

 
$
119,049

 
$
167,710

 
$
15,056,241

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


111

Allowance for Loan Losses and Recorded Investment in Loans (Continued)
(Amounts in thousands)
 
 
Year Ended December 31, 2015
 
Commercial 
 
Commercial Real Estate
 
Construction 
 
Residential
Real
Estate
 
Home
Equity
 
Personal
 
Total
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
$
103,462

 
$
31,838

 
$
4,290

 
$
5,316

 
$
4,924

 
$
2,668

 
$
152,498

Loans charged-off
(11,438
)
 
(1,458
)
 
—

 
(494
)
 
(716
)
 
(59
)
 
(14,165
)
Recoveries on loans previously charged-off
4,396

 
1,209

 
204

 
318

 
507

 
1,102

 
7,736

Net (charge-offs) recoveries
(7,042
)
 
(249
)
 
204

 
(176
)
 
(209
)
 
1,043

 
(6,429
)
Provision (release) for loan losses
21,199

 
(3,979
)
 
947

 
(901
)
 
(971
)
 
(1,628
)
 
14,667

Balance at end of year
$
117,619

 
$
27,610

 
$
5,441

 
$
4,239

 
$
3,744

 
$
2,083

 
$
160,736

Ending balance, loans individually evaluated for impairment (1)
$
4,458

 
$
1,156

 
$
—

 
$
539

 
$
1,106

 
$
3

 
$
7,262

Ending balance, loans collectively evaluated for impairment
$
113,161

 
$
26,454

 
$
5,441

 
$
3,700

 
$
2,638

 
$
2,080

 
$
153,474

Recorded Investment in Loans:
Ending balance, loans individually evaluated for impairment (1)
$
47,320

 
$
8,501

 
$
—

 
$
4,762

 
$
9,691

 
$
21

 
$
70,295

Ending balance, loans collectively evaluated for impairment
8,588,307

 
3,344,009

 
522,263

 
456,650

 
119,626

 
165,325

 
13,196,180

Total recorded investment in loans
$
8,635,627

 
$
3,352,510

 
$
522,263

 
$
461,412

 
$
129,317

 
$
165,346

 
$
13,266,475

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


112

Allowance for Loan Losses and Recorded Investment in Loans (Continued)
(Amounts in thousands)
 
 
Year Ended December 31, 2014
 
Commercial 
 
Commercial Real Estate
 
Construction 
 
Residential
Real
Estate
 
Home
Equity
 
Personal
 
Total
Allowance for Loan Losses:
 
 
 
 
 
 
Balance at beginning of year
$
80,768

 
$
42,362

 
$
3,338

 
$
7,555

 
$
5,648

 
$
3,438

 
$
143,109

Loans charged-off
(5,588
)
 
(6,214
)
 
(6
)
 
(1,514
)
 
(1,017
)
 
(158
)
 
(14,497
)
Recoveries on loans previously charged-off
6,340

 
2,674

 
79

 
675

 
228

 
721

 
10,717

Net recoveries (charge-offs)
752

 
(3,540
)
 
73

 
(839
)
 
(789
)
 
563

 
(3,780
)
Provision (release) for loan losses
21,942

 
(6,984
)
 
879

 
(1,400
)
 
65

 
(1,333
)
 
13,169

Balance at end of year
$
103,462

 
$
31,838

 
$
4,290

 
$
5,316

 
$
4,924

 
$
2,668

 
$
152,498

Ending balance, loans individually evaluated for impairment (1)
$
11,487

 
$
2,441

 
$
—

 
$
735

 
$
1,855

 
$
109

 
$
16,627

Ending balance, loans collectively evaluated for impairment
$
91,975

 
$
29,397

 
$
4,290

 
$
4,581

 
$
3,069

 
$
2,559

 
$
135,871

Recorded Investment in Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance, loans individually evaluated for impairment (1)
$
52,171

 
$
19,948

 
$
—

 
$
5,274

 
$
12,466

 
$
430

 
$
90,289

Ending balance, loans collectively evaluated for impairment
7,836,463

 
2,896,771

 
381,102

 
356,291

 
129,711

 
201,592

 
11,801,930

Total recorded investment in loans
$
7,888,634

 
$
2,916,719

 
$
381,102

 
$
361,565

 
$
142,177

 
$
202,022

 
$
11,892,219

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

Reserve for Unfunded Commitments (1) 
(Amounts in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Balance at beginning of year
$
11,759

 
$
12,274

 
$
9,206

Provision (release) for unfunded commitments
5,381

 
(519
)
 
3,152

Recovery (charge-off) of unfunded commitments
—

 
4

 
(84
)
Balance at end of year
$
17,140

 
$
11,759

 
$
12,274

 Unfunded commitments, excluding covered assets, at year end
$
6,804,421

 
$
6,468,324

 
$
6,041,301

(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 share agreement with the FDIC.

Refer to Note 19 for additional details of commitments to extend credit, standby letters of credit and commercial letters of credit.


113

6. PREMISES, FURNITURE, AND EQUIPMENT

Premises, Furniture, and Equipment
(Amounts in thousands)
 
 
December 31,
 
2016
 
2015
Land
$
1,872

 
$
1,874

Building
10,250

 
10,079

Leasehold improvements
42,737

 
43,575

Furniture and equipment
48,987

 
37,478

Software
16,143

 
15,087

Total cost
119,989

 
108,093

Accumulated depreciation
(73,022
)
 
(65,688
)
Net book value
$
46,967

 
$
42,405


Depreciation expense on premises, furniture, and equipment totaled $9.4 million, including $535,000 in impairment, in 2016, $8.5 million in 2015 and $8.7 million in 2014.

At December 31, 2016, we were obligated under certain non-cancellable operating leases for premises and equipment, which expire at various dates through the year 2031. Many of these leases contain renewal options, and certain leases provide a right of refusal to purchase the leased property during the lease term. Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating expenses, or proportionately adjusted for increases in the consumer price index. The following summary reflects the future minimum rental payments, by year, required under operating leases that, as of December 31, 2016, have initial or remaining non-cancellable lease terms in excess of one year.

Operating Leases (1) 
(Amounts in thousands)
 
 
Total
Year Ended December 31,
 
2017
$
13,668

2018
13,885

2019
13,526

2020
13,029

2021
12,578

2022 and thereafter
46,420

Total minimum lease payments
$
113,106

(1) 
Minimum payments have not been reduced by minimum sublease rentals of $1.5 million due in the future under non-cancellable subleases.

 
Year Ended December 31,
 
2016
 
2015
 
2014
Rental expense charged to operations (1)(2)
$
12,541

 
$
12,670

 
$
12,066

Rental income from premises leased to others (2)
$
751

 
$
770

 
$
704

(1) 
Including amounts paid under short-term cancellable leases.
(2) 
Does not include rental expense or sublease rental income for certain restructured leases.


114

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Carrying Amount of Goodwill by Operating Unit
(Amounts in thousands)
 
 
December 31,
 
2016
 
2015
 
2014
Banking
$
81,755

 
$
81,755

 
$
81,755

Asset Management
12,286

 
12,286

 
12,286

Total
$
94,041

 
$
94,041

 
$
94,041


In conjunction with our annual goodwill impairment test performed as of October 31, 2016, we elected to perform a qualitative assessment to determine whether it was more likely than not that the fair values of the Banking and Asset Management reporting units were less than their carrying values. Based on our analysis, we determined it was not more likely than not that the fair values of the Banking and Asset Management reporting units were less than their carrying values, and as such we bypassed the two-step quantitative goodwill impairment test and concluded that goodwill was not impaired as of October 31, 2016.

We are not aware of any events or circumstances subsequent to our annual goodwill impairment testing date of October 31, 2016 that would indicate impairment of goodwill allocated to the Banking and Asset Management reporting units at December 31, 2016. There were no impairment charges for goodwill allocated to the Banking and Asset Management reporting units recorded in 2015 or 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 other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. During 2016, there were no events or circumstances that we believe indicate there may be impairment of other intangible assets, and no impairment charges for other intangible assets were recorded in 2016, 2015, or 2014.

Other Intangible Assets
(Amounts in thousands)
 

 
Year Ended December 31,
 
2016
 
2015
 
2014
Core deposit intangible:
 
 
 
 
 
Gross carrying amount
$
12,378

 
$
18,093

 
$
18,093

Accumulated amortization
11,420

 
15,140

 
12,870

Net carrying amount
$
958

 
$
2,953

 
$
5,223

Amortization during the period
$
1,995

 
$
2,270

 
$
2,799

Weighted-average remaining life (in years)
0.5

 
1.5

 
2.5

Client relationships:
 
 
 
 
 
Gross carrying amount
$
1,459

 
$
2,002

 
$
2,002

Accumulated amortization
1,148

 
1,525

 
1,340

Net carrying amount
$
311

 
$
477

 
$
662

Amortization during the period
$
166

 
$
185

 
$
208

Weighted-average remaining life (in years)
4.1

 
5.1

 
5.9



115

Scheduled Amortization of Other Intangible Assets
(Amounts in thousands)
 
 
Total
Year Ended December 31,
 
2017
$
1,125

2018
98

2019
28

2020
15

2021
3

2022 and thereafter
—

Total
$
1,269


8. DEPOSITS

Summary of Deposits
(Amounts in thousands)
 
 
December 31,
 
2016
 
2015
Noninterest-bearing deposits
$
5,196,587

 
$
4,355,700

Interest-bearing deposits
1,942,992

 
1,503,372

Savings deposits
439,689

 
377,191

Money market accounts
6,144,950

 
5,919,252

Time deposits less than $100,000 (1)
298,169

 
270,483

Time deposits of $100,000 or more (1)
2,042,842

 
1,919,594

Total deposits
$
16,065,229

 
$
14,345,592

(1) 
Time deposits with a minimum denomination of $250,000 totaled $1.5 billion and $1.3 billion at December 31, 2016 and December 31, 2015, respectively.
 
Scheduled Maturities of Time Deposits
(Amounts in thousands)
 
 
Total
Year ending December 31,
 
2017:
 
First quarter
$
423,114

Second quarter
382,576

Third quarter
530,183

Fourth quarter
211,024

2018
289,951

2019
144,329

2020
211,616

2021
147,997

2022 and thereafter
221

Total
$
2,341,011



116

Maturities of Time Deposits of $100,000 or More
(Amounts in thousands)
 
 
2016
Maturing within 3 months
$
390,693

After 3 but within 6 months
333,305

After 6 but within 12 months
622,421

After 12 months
696,423

Total
$
2,042,842


9. SHORT-TERM BORROWINGS

Summary of Short-Term Borrowings
(Dollars in thousands)

 
December 31, 2016
 
December 31, 2015
 
Amount
 
Rate
 
Amount
 
Rate
Outstanding:
 
 
 
 
 
 
 
FHLB advances
$
1,540,000

 
0.63
%
 
$
370,000

 
0.16
%
Other borrowings
1,773

 
0.18
%
 
250

 
0.20
%
Secured borrowing
2,973

 
4.05
%
 
2,217

 
4.00
%
Total short-term borrowings
$
1,544,746

 
 
 
$
372,467

 
 
Unused Availability:
 
 
 
 
 
 
 
Federal funds (1)
$
620,500

 
 
 
$
630,500

 
 
FRB discount window primary credit program (2)
668,412

 
 
 
384,419

 
 
FHLB advances (3)
648,199

 
 
 
1,481,102

 
 
Revolving line of credit
60,000

 
 
 
60,000

 
 
(1) 
Our total availability of overnight Federal fund (“Fed funds”) 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.
(3) 
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 December 31, 2016, our borrowing capacity was $2.2 billion, of which $648.2 million is available, subject to making the required additional investment in FHLB Chicago stock.

Borrowings with maturities of one year or less are classified as short-term.

FHLB Advances - At December 31, 2016, FHLB advances totaled $1.6 billion, consisting of $1.5 billion in short-term borrowings, and $50.0 million classified as long-term debt. Qualifying residential, multi-family and commercial real estate (“CRE”) loans, home equity lines of credit, and residential mortgage-backed securities are pledged as collateral to secure current outstanding balances and additional borrowing availability.

Other Borrowings - At December 31, 2016, other borrowings consisted of cash received by counterparty in excess of derivative liability and the Company’s obligation to a third party bank under a commercial credit card servicing arrangement. At December 31, 2015, other borrowings represented cash received by counterparty in excess of derivative liability.

Secured Borrowings - Secured borrowings represent 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. A corresponding amount is recorded within loans on the consolidated statements of financial condition.

Revolving Line of Credit - The Company has a 364-day revolving line of credit (the “Facility”) with a group of commercial banks allowing borrowing of up to $60.0 million, and maturing on the earlier of September 22, 2017 or the consummation of the Company’s merger with CIBC. The interest rate applied to borrowings under the Facility will be elected by the Company at the time an advance is made; interest rate elections include either 30-day or 90-day LIBOR plus 1.75% or Prime minus 0.50% at the time the advance

117

is made. Any amounts outstanding under the Facility upon or before maturity may be converted, at the Company’s option, to an amortized term loan, with the balance of such loan due September 22, 2019 (subject to earlier maturity upon consummation of the merger with CIBC, as previously noted). At December 31, 2016, no amounts were drawn on the Facility.

10. LONG-TERM DEBT

Long-Term Debt
(Dollars in thousands)
 
 
 
 
 
 
 
 
December 31,
 
Rate Type
 
Contractual Rate
 
Maturity
 
2016
 
2015
Parent Company:
 
 
 
 
 
 
 
 
 
Junior Subordinated Debentures (1)
 
 
 
 
 
 
 
 
 
Bloomfield Hills Statutory Trust I
Floating, three-month LIBOR + 2.65%
 
3.64%
 
2034
 
$
8,248

 
$
8,248

PrivateBancorp Statutory Trust II
Floating, three-month LIBOR + 1.71%
 
2.67%
 
2035
 
51,547

 
51,547

PrivateBancorp Statutory Trust III
Floating, three-month LIBOR + 1.50%
 
2.46%
 
2035
 
41,238

 
41,238

PrivateBancorp Statutory Trust IV (2)
Fixed
 
10.00%
 
2068
 
66,618

 
66,576

Subordinated debt facility (3) (4)
Fixed
 
7.125%
 
2042
 
120,659

 
120,606

Subtotal
 
 
 
 
 
 
288,310

 
288,215

Subsidiaries:
 
 
 
 
 
 
 
 
 
FHLB advances
 
 
—
 

 
—

 
350,000

FHLB advances (5)
Fixed
 
3.58% - 4.68%
 
2019
 
50,000

 
50,000

 
 
 
 
 
 
 
$
338,310

 
$
688,215

 
(1) 
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 could be subject to phase-out in the event we were to make certain acquisitions. Furthermore, upon completion of our pending merger with CIBC, we do not expect the outstanding Trust Preferred Securities to continue to qualify as Tier 1 capital under FRB regulations as currently in effect.
(2) 
Net of deferred financing costs of $2.1 million at December 31, 2016 and $2.2 million at December 31, 2015.
(3) 
Net of deferred financing costs of $4.3 million at December 31, 2016 and $4.4 million at December 31, 2015.
(4) 
Qualifies as Tier 2 capital for regulatory capital purposes.
(5) 
Weighted average interest rate was 3.75% at December 31, 2016 and 2015.

The $167.7 million in junior subordinated debentures presented 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 11 for further information on the nature and terms of these and previously issued debentures.

At December 31, 2016, outstanding long-term FHLB advances were secured by qualifying residential, multi-family, commercial real estate, and home equity lines of credit. From time to time, we may pledge eligible real estate mortgage-backed securities to support additional borrowings. The advances include a prepayment feature and are subject to a prepayment fee.

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 Ended December 31,
 
2019
$
50,000

2034 and thereafter
288,310

Total
$
338,310



118

11. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES HELD BY TRUSTS THAT ISSUED TRUST PREFERRED SECURITIES

As of December 31, 2016, we sponsored and wholly owned 100% of the common equity of four trusts that were formed for the purpose of issuing 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 totaled $167.7 million, net of deferred financing costs, at December 31, 2016, are the sole assets of each respective trust. Our obligations under the Debentures and related documents constitute a full and unconditional guarantee by the Company on a subordinated basis of all 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 at a redemption price of 100% of the principal amount plus accrued and unpaid interest. The repayment, redemption or repurchase of any of the Debentures would be subject to the terms of the applicable indenture and result in a corresponding repayment, redemption or repurchase of an equivalent amount of the related series of Trust Preferred Securities. Any redemption of the 10% Debentures held by the PrivateBancorp Capital Trust IV also would be subject to the terms of the replacement capital covenant described below.

In connection with the issuance in 2008 of the 10% Debentures, which rank junior to the other Debentures, we entered into a replacement capital covenant that relates to the redemption of the 10% 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 10% 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.

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 and held by us are included in other assets in our consolidated statements of financial condition with the related dividend distributions recorded in other non-interest income.


119

Common Securities, Preferred Securities, and Related Debentures
(Dollars in thousands)
 
Issuance Date
 
Common Securities Issued
 
Trust Preferred Securities Issued (1)
 
Coupon Rate (2)
 
Maturity
 
Principal Amount of Debentures (1)
 
December 31,
 
2016
 
Bloomfield Hills Statutory Trust I
May 2004
 
$
248

 
$
8,000

 
3.64
%
 
June 2034
 
$
8,248

 
PrivateBancorp Statutory Trust II
June 2005
 
1,547

 
50,000

 
2.67
%
 
Sept. 2035
 
51,547

 
PrivateBancorp Statutory Trust III
Dec. 2005
 
1,238

 
40,000

 
2.46
%
 
Dec. 2035
 
41,238

 
PrivateBancorp Capital Trust IV
May 2008
 
5

 
68,750

 
10.00
%
 
June 2068
 
66,618

(3) 
Total
 
 
$
3,038

 
$
166,750

 
 
 
 
 
$
167,651

 
 
(1) 
The Trust Preferred Securities accrue distributions at a rate equal to the interest rate on, and have a redemption date identical to the maturity date of, the corresponding Debentures. The Trust Preferred Securities are subject to mandatory redemption upon repayment of the Debentures at maturity or upon earlier redemption.
(2) 
Reflects the coupon rate in effect at December 31, 2016. The coupon rates for Bloomfield Hills Statutory Trust I, PrivateBancorp Statutory Trust II and PrivateBancorp Statutory Trust III are variable based on three-month LIBOR plus 2.65%, 1.71% and 1.50%, respectively. The coupon rate for PrivateBancorp Capital Trust IV is fixed. Distributions on all Trust Preferred Securities 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) 
Net of deferred financing costs of $2.1 million at December 31, 2016.
 
12. EQUITY

Capital Stock

At December 31, 2016 and 2015, the Company had authority to issue 180 million shares of capital stock, consisting of one million shares of preferred stock, five million shares of non-voting common stock and 174 million shares of voting common stock. At December 31, 2016 and 2015, no shares of preferred stock or non-voting common stock were issued or outstanding. The Company had 79.8 million and 79.1 million shares of voting common stock issued and outstanding at December 31, 2016 and 2015, respectively.

The Company reissues treasury stock, when available, or new shares to fulfill its obligation to issue shares granted pursuant to the share-based compensation plans. Treasury shares are reissued at average cost. The Company held no shares in treasury at December 31, 2016 and 2,574 shares in treasury at December 31, 2015.


120

Comprehensive Income

Change in Accumulated Other Comprehensive Income (“AOCI”) by Component
(Amounts in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
Unrealized
Gain on
Available-
for-Sale
Securities
 
Accumu-
lated
(Loss)
Gain on
Effective
Cash Flow
Hedges
 
Total
 
Unrealized
Gain on
Available-
for-Sale
Securities
 
Accumu-
lated Gain
(Loss) on
Effective
Cash Flow
Hedges
 
Total
 
Unrealized
Gain on
Available-
for-Sale
Securities
 
Accumu-
lated Gain
on
Effective
Cash Flow
Hedges
 
Total
Balance at beginning of year
$
14,048

 
$
3,211

 
$
17,259

 
$
19,448

 
$
1,469

 
$
20,917

 
$
12,960

 
(3,116
)
 
$
9,844

Increase in unrealized (losses) gains on securities
(27,628
)
 
—

 
(27,628
)
 
(7,440
)
 
—

 
(7,440
)
 
11,244

 
—

 
11,244

Increase in unrealized gains (losses) on cash flow hedges
—

 
10,282

 
10,282

 
—

 
13,152

 
13,152

 
—

 
16,777

 
16,777

Tax benefit (expense) on increase in unrealized (losses) gains
10,787

 
(3,950
)
 
6,837

 
2,829

 
(5,083
)
 
(2,254
)
 
(4,435
)
 
(6,576
)
 
(11,011
)
Other comprehensive (loss) income before reclassifications
(16,841
)
 
6,332

 
(10,509
)
 
(4,611
)
 
8,069

 
3,458

 
6,809

 
10,201

 
17,010

Reclassification adjustment of net gains included in net income (1)
(1,111
)
 
(7,235
)
 
(8,346
)
 
(1,287
)
 
(10,320
)
 
(11,607
)
 
(530
)
 
(9,262
)
 
(9,792
)
Reclassification adjustment for tax expense on realized net gains (2)
428

 
2,786

 
3,214

 
498

 
3,993

 
4,491

 
209

 
3,646

 
3,855

Amounts reclassified from AOCI
(683
)
 
(4,449
)
 
(5,132
)
 
(789
)
 
(6,327
)
 
(7,116
)
 
(321
)
 
(5,616
)
 
(5,937
)
Net current period other comprehensive (loss) income
(17,524
)
 
1,883

 
(15,641
)
 
(5,400
)
 
1,742

 
(3,658
)
 
6,488

 
4,585

 
11,073

Balance at end of year
$
(3,476
)
 
$
5,094

 
$
1,618

 
$
14,048

 
$
3,211

 
$
17,259

 
$
19,448

 
$
1,469

 
$
20,917

(1)
The amounts reclassified from AOCI for the available-for-sale securities are reported 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. For the year ended December 31, 2015, $466,000 was reclassified out of AOCI related to OTTI on available-for-sale securities and included in the consolidated statements of income within net securities gains.
(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.
 

121

13. EARNINGS PER COMMON SHARE

Basic and Diluted Earnings per Common Share
(Amounts in thousands, except per share data)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Basic earnings per common share
 
 
 
 
 
Net income
$
208,357

 
$
185,311

 
$
153,079

Net income allocated to participating stockholders (1)
(1,720
)
 
(1,625
)
 
(2,134
)
Net income allocated to common stockholders
$
206,637

 
$
183,686

 
$
150,945

Weighted-average common shares outstanding
78,900

 
77,968

 
77,007

Basic earnings per common share
$
2.62

 
$
2.36

 
$
1.96

Diluted earnings per common share
 
 
 
 
 
Diluted earnings applicable to common stockholders (2)
$
206,670

 
$
183,711

 
$
150,967

Weighted-average diluted common shares outstanding:
 
 
 
 
 
Weighted-average common shares outstanding
78,900

 
77,968

 
77,007

Dilutive effect of stock awards (3)
1,584

 
1,238

 
815

Weighted-average diluted common shares outstanding
80,484

 
79,206

 
77,822

Diluted earnings per common share
$
2.57

 
$
2.32

 
$
1.94

(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, restricted stock and performance share 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 earnings to common stockholders and participating securities for the purposes of calculating diluted earnings per share.
(3) 
For the years ended December 31, 2016, 2015, and 2014, the weighted-average outstanding non-participating securities of 290,000, 360,000 and 1.2 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.
 
14. INCOME TAXES

Components of Income Taxes
(Amounts in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Current income tax provision:
 
 
 
 
 
Federal
$
114,019

 
$
97,942

 
$
86,234

State
18,133

 
14,968

 
17,078

Total
132,152

 
112,910

 
103,312

Deferred income (benefit) tax provision:
 
 
 
 
 
Federal
(15,008
)
 
(2,236
)
 
(7,392
)
State
(1,500
)
 
415

 
(792
)
Total
(16,508
)
 
(1,821
)
 
(8,184
)
Total income tax provision
$
115,644

 
$
111,089

 
$
95,128



122

Reconciliation of Income Tax Provision to Statutory Federal Rate
(Amounts in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Income tax provision at statutory federal income tax rate
$
113,400

 
$
103,739

 
$
86,872

(Decrease) increase in taxes resulting from:
 
 
 
 
 
Tax exempt interest
$
(3,185
)
 
$
(2,842
)
 
$
(2,139
)
Meals, entertainment and related expenses
935

 
757

 
621

Bank owned life insurance
(512
)
 
(506
)
 
(470
)
Tax credit investments
(2,485
)
 
(518
)
 
(331
)
State income taxes
10,403

 
9,692

 
10,292

Share-based compensation charges
(3,704
)
 
—

 
—

Deferred tax asset adjustments
515

 
652

 
504

Other
277

 
115

 
(221
)
Total income tax provision
$
115,644

 
$
111,089

 
$
95,128


Differences between the amounts reported in the consolidated financial statements and the tax bases of assets and liabilities result in temporary differences for which deferred tax assets and liabilities have been recorded.

Deferred Tax Assets and Liabilities
(Amounts in thousands)
 
 
December 31,
 
2016
 
2015
Deferred tax assets:
 
 
 
Allowance for loan losses
$
78,090

 
$
66,713

Share-based payments
18,100

 
16,883

Deferred compensation
8,427

 
6,906

Loan fees and costs
19,409

 
17,671

OREO write-downs
4,916

 
4,509

Premises and equipment
1,626

 
2,253

Covered assets
1,783

 
2,324

Unrealized losses on securities available-for-sale
2,105

 
—

Other
4,014

 
3,003

Total deferred tax assets
138,470

 
120,262

Deferred tax liabilities:
 
 
 
Unrealized gain on securities available-for-sale
—

 
(9,004
)
Intangible assets and acquisition adjustments
(6,138
)
 
(6,732
)
Other
(3,549
)
 
(2,290
)
Total deferred tax liabilities
(9,687
)
 
(18,026
)
Net deferred tax assets
$
128,783

 
$
102,236


Deferred Tax Assets

At December 31, 2016, 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. This conclusion was based on our recent earnings history, on both a book and tax basis, and our outlook for earnings and taxable income in future periods. The net deferred tax asset is recorded on the statement of financial condition within other assets.

123


Taxable income in prior years and reversing deferred taxable temporary differences provide sources from which deferred tax assets may be absorbed. Additionally, we have relied on our expectation of generating pre-tax earnings in future periods, which should give rise to taxable income levels, exclusive of reversing temporary differences, that more likely than not will be sufficient to absorb the deferred tax assets.

Liabilities Associated with Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Roll Forward of Unrecognized Tax Benefits
(Amounts in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Balance at beginning of year
$
194

 
$
269

 
$
411

Additions for tax positions taken during prior periods
4,659

 
—

 
—

Reductions for tax positions taken during prior periods
(12
)
 
(15
)
 
(142
)
Reductions for lapse of statute of limitations
—

 
(10
)
 
—

Reductions for settlements with tax authorities
—

 
(50
)
 
—

Balance at end of year
$
4,841

 
$
194

 
$
269

Interest and penalties, net of tax effect, recognized in income tax expense (benefit) during the year
$
58

 
$
(50
)
 
$
(6
)
Interest and penalties, net of tax effect, accrued at year end (1)
$
62

 
$
3

 
$
54

(1) 
Not included in the unrecognized tax benefits presented above.

As of December 31, 2016 and 2015, we had $3.3 million and $126,000, respectively, of unrecognized tax benefits relating to uncertain tax positions that, if recognized, would impact the effective tax rate. It is reasonably possible that a significant portion of the liability for unrecognized tax benefits at December 31, 2016 could decrease in the next twelve months due to completion of state tax authorities’ exams or the expiration of statutes of limitations.

We file a U.S. federal income tax return and state income tax returns in various states. We are no longer subject to examinations by U.S. federal tax authorities for 2007 and prior years. We are also no longer subject to examinations by state tax authorities for 2008 and prior years.

15. SHARE-BASED COMPENSATION AND OTHER BENEFITS

Share-Based Plans

The Company adopted the 2011 Incentive Compensation Plan (the “2011 Plan”) in May 2011. In 2014, the Company’s stockholders approved an amendment and restatement of the 2011 Plan to add 2.0 million authorized shares for a total of approximately 6.7 million shares of common stock. The 2011 Plan is designed to align the interests of management with the interests of shareholders, foster retention, create a long-term focus and provide participants a competitive long-term incentive opportunity. The 2011 Plan allows for the issuance of incentive and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units, equity-based performance stock and units, stock awards and other cash and share-based incentives to employees, including officers and non-employee directors of the Company and its subsidiaries. At December 31, 2016, 1.9 million shares were available for future grant under the 2011 Plan. The Company has three other share-based compensation plans for which no shares remain available for grant, but have unexercised awards outstanding at December 31, 2016. The Company issues shares from treasury, when available, or new shares to fulfill its obligation to issue shares pursuant to grants under the share-based compensation plans. To the extent new shares are issued, the Company believes as of December 31, 2016, there are adequate authorized shares to satisfy anticipated award issuances in 2017.


124

Financial Statement Impact

The following table presents the share-based compensation expense and related income tax benefits recognized for all equity awards in the accompanying consolidated statements of income for the years ended December 31, 2016, 2015 and 2014.

Effect of Recognizing Share-based Compensation Expense
(Amounts in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Recognized share-based compensation expense:
 
 
 
 
 
Stock option expense
$
2,943

 
$
3,337

 
$
3,710

Restricted stock and unit expense
14,140

 
12,918

 
10,562

Performance share unit expense
3,654

 
2,584

 
1,296

Total share-based compensation expense
20,737

 
18,839

 
15,568

Income tax benefit
(7,976
)
 
(7,271
)
 
(6,050
)
Share-based compensation expense, net of tax
$
12,761

 
$
11,568

 
$
9,518

Unrecognized share-based compensation expense:
 
 
 
 
 
Stock options
$
3,131

 
$
2,855

 
$
3,391

Weighted-average amortization period remaining (in years)
1.8

 
1.7

 
1.6

Restricted stock and unit expense
$
12,800

 
$
12,343

 
$
11,902

Weighted-average amortization period remaining (in years)
1.7

 
1.7

 
1.7

Performance share unit expense (1)
$
3,765

 
$
3,991

 
$
2,694

Weighted-average amortization period remaining (in years)
1.7

 
1.8

 
2.0

(1) 
Based on an estimate of the number of shares expected to vest as a result of actual performance against the performance criteria at December 31, 2016, 2015 and 2014. For additional information regarding our performance share units, refer to the “Performance Share Units” section further in this Note.


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Stock Options

Stock option awards have an exercise price equal to the closing price of the Company’s common stock on the date the awards are granted. Stock options vest three years from grant based on continuous service and have a ten-year term. The following table summarizes stock option activity for the years ended December 31, 2016, 2015 and 2014.

Stock Option Activity
(Amounts in thousands, except per share data)
 
 
Options
 
Weighted-Average
 
Aggregate
Intrinsic
Value (2)
Exercise
Price
 
Remaining
Contractual
Life (1)
 
2014
 
 
 
 
 
 
 
Outstanding at beginning of year
4,090

 
$
23.66

 
 
 
 
Granted
203

 
27.98

 
 
 
 
Exercised
(277
)
 
18.59

 
 
 
 
Forfeited
(15
)
 
18.82

 
 
 
 
Expired
(123
)
 
34.23

 
 
 
 
Outstanding at end of year
3,878

 
$
23.94

 
5.0
 
$
38,174

Exercisable at end of year
2,862

 
$
25.57

 
3.9
 
$
23,890

2015
 
 
 
 
 
 
 
Outstanding at beginning of year
3,878

 
$
23.94

 
 
 
 
Granted
186

 
35.20

 
 
 
 
Exercised
(838
)
 
25.10

 
 
 
 
Forfeited
(27
)
 
20.89

 
 
 
 
Expired
(8
)
 
37.43

 
 
 
 
Outstanding at end of year
3,191

 
$
24.28

 
4.6
 
$
53,716

Exercisable at end of year
2,210

 
$
24.72

 
3.2
 
$
36,297

2016
 
 
 
 
 
 
 
Outstanding at beginning of year
3,191

 
$
24.28

 
 
 
 
Granted
204

 
34.19

 
 
 
 
Exercised
(573
)
 
25.56

 
 
 
 
Forfeited
(8
)
 
29.02

 
 
 
 
Expired
(54
)
 
46.51

 
 
 
 
Outstanding at end of year
2,760

 
$
24.30

 
4.2
 
$
82,500

Exercisable at end of year
2,182

 
$
22.13

 
3.2
 
$
69,936

Ending vested and expected to vest
2,707

 
$
24.10

 
4.1
 
$
81,441

(1) 
Represents the average contractual life remaining in years.
(2) 
Aggregate intrinsic value represents the total pretax intrinsic value of the “in-the-money” stock options, (i.e., the difference between our closing stock price on the last trading day of the respective year and the option exercise price, multiplied by the number of shares) that would have been received by the option holders if they had exercised their options on the last day of the respective year. This amount will fluctuate with changes in the fair value of our common stock.


126

Summary of Stock Options Outstanding and Exercisable
(Number of shares in thousands)
 
 
Outstanding Options
 
Exercisable Options
Range of Exercise Price
Shares
 
Weighted-Average
 
Shares
 
Weighted-
Average
Exercise
Price
Remaining
Contractual
Life (1)
 
Exercise
Price
 
$6.92 - $15.04
691
 
4.4
 
$
14.36

 
691
 
$
14.36

$15.05 - $25.22
484
 
6.0
 
18.01

 
484
 
18.01

$25.23 - $26.84
527
 
0.9
 
26.16

 
527
 
26.16

$26.85 - $33.77
529
 
3.3
 
30.29

 
336
 
31.61

$33.78 - $44.50
529
 
6.6
 
35.16

 
144
 
36.47

Total
2,760
 
4.2
 
$
24.30

 
2,182
 
$
22.13

 
(1) 
Represents the weighted-average contractual life remaining in years.

Stock Option Valuation Assumptions - The fair value of stock options is estimated at the date of grant using a binomial option-pricing model that utilizes the assumptions outlined in the following table.

Stock Option Valuation Assumptions
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Expected life of the option (in years)
6.9 - 7.0

 
6.5

 
6.0

Expected stock volatility
43.4 - 46.2%

 
42.4 - 43.3%

 
43.3 - 44.3%

Risk-free interest rate
1.7 - 1.8%

 
1.9
%
 
1.8 - 2.1%

Expected dividend yield
0.1%

 
0.1%

 
0.1
%
Weighted-average fair value of options at their grant date
$
16.48

 
$
15.86

 
$
12.20


Expected life is based on historical exercise and termination behavior. Expected stock price volatility is based on historical volatility of our common stock combined with the implied volatility on the exchange-traded stock options that are derived from the value of our common stock. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the option. The expected dividend yield represents the most recent annual dividend yield as of the date of grant. Management reviews and adjusts the assumptions used to calculate the fair value of an option on a periodic basis to reflect updated information.

Other Stock Option Information
(Dollars in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Total intrinsic value of stock options exercised
$
11,440

 
$
11,386

 
$
3,204

Cash received from stock options exercised
$
14,650

 
$
20,938

 
$
5,149

Income tax benefit realized from stock options exercised (1)
$
4,372

 
$
4,307

 
$
1,217

(1) 
Amounts may be more or less than deferred tax benefit recorded during vesting period.

Restricted Stock and Restricted Unit Awards

We issue common stock with restrictions to certain key employees. The shares are restricted as to transfer, but are not restricted as to voting rights. Dividends are accrued and paid out at the same time the underlying shares are settled. The transfer restrictions generally lapse over a three year period and are contingent upon continued employment. We also issue restricted stock units which

127

settle in common stock when restrictions lapse which generally coincides with the vest date for most awards, however certain awards have a delayed settlement date. Restricted stock units are issued on similar terms as restricted common stock (with the exception of non-employee directors whose restrictions lapse in equal quarterly installments over a one-year period) and have the right to receive dividend equivalents at settlement, but no voting rights. The fair value of restricted stock and units is based on our closing stock price on the date of grant. For certain restricted stock unit awards with delayed settlement, a discount for lack of marketability (“DLOM”) was applied to the grant date fair value. The weighted-average DLOM applied to awards granted was 28% in 2016, 27% in 2015 and 24% in 2014. The following table summarizes our restricted stock and unit activity for the years ended December 31, 2016, 2015 and 2014.

Restricted Stock and Unit Awards Activity
(Number of shares/units in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
Number
of Shares/
Units
 
Weighted-Average Grant Date Fair Value (1)
 
Number
of Shares/
Units
 
Weighted-Average Grant Date Fair Value (1)
 
Number
of Shares/
Units
 
Weighted-Average Grant Date Fair Value (1)
Nonvested restricted stock and unit awards at beginning of year
871

 
$
27.61

 
1,093

 
$
20.18

 
1,268

 
$
15.76

Granted
457

 
32.35

 
416

 
33.52

 
431

 
27.15

Vested
(486
)
 
24.48

 
(610
)
 
18.33

 
(577
)
 
15.62

Forfeited
(10
)
 
32.94

 
(28
)
 
27.55

 
(29
)
 
21.51

Nonvested restricted stock and unit awards at end of year
832

 
$
31.99

 
871

 
$
27.61

 
1,093

 
$
20.18

Vested, but not issued at end of year (2)
271

 
$
17.66

 
213

 
$
16.46

 
164

 
$
16.56

(1) 
Includes the effect of the DLOM.
(2) 
Represents restricted stock units with a delayed settlement date.

Other Restricted Stock and Unit Award Information
(Dollars in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Total fair value of vested/released restricted stock and units
$
15,731

 
$
19,613

 
$
16,135

Current income tax benefit realized from vesting/release of restricted stock and unit awards (1)
$
6,018

 
$
7,297

 
$
6,036

(1) 
Amount may be more or less than deferred tax benefit recorded during vesting period.
 
Performance Share Units

Performance share units (“PSUs”) are a component of our executive compensation program which entitles recipients to receive the underlying shares of common stock subject to continued service and the Company’s achievement of specified performance criteria over a three-year period including a relative total shareholder return (“TSR”) multiplier. PSUs are granted at a target number of shares and based on the Company’s performance, the number of shares that vest can be adjusted downward to zero and upward to a maximum of 200%, based on relative TSR against an index of 50 banks over the same three-year period as the performance criteria. The PSUs vest in the quarter following the end of the performance period, after review and certification of the achievement of the specified performance criteria by the Company’s Compensation Committee of the Board of Directors. The PSUs will be settled and converted to shares of common stock two years after vesting, subject to recoupment under certain circumstances. Holders of PSUs are not entitled to vote or receive cash dividends until settlement, but do accrue a dividend equivalent at the same rate as dividend payments to stockholders from grant date until settlement and to be paid out at that time based on actual shares converted to common stock. The fair value of PSUs is based on our closing stock price on the date of grant,

128

adjusted to reflect any market conditions and is net of a DLOM due to the delayed settlement provisions. The following table summarizes our performance share unit activity for the years ended December 31, 2016, 2015 and 2014.

Performance Share Units Activity (1) 
(Number of shares/units in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
Number
of Shares/
Units
 
Weighted-Average Grant Date Fair Value (2)
 
Number
of Shares/
Units
 
Weighted-Average Grant Date Fair Value (2)
 
Number
of Shares/
Units
 
Weighted-Average Grant Date Fair Value (2)
Nonvested performance share unit awards at beginning of year
241

 
$
25.50

 
150

 
$
22.19

 
54

 
$
15.44

Granted (3)
123

 
28.71

 
93

 
30.84

 
99

 
26.00

Vested (3)
(81
)
 
15.44

 
—

 
—

 
—

 
—

Forfeited
(1
)
 
30.84

 
(2
)
 
26.00

 
(3
)
 
26.00

Nonvested performance share unit awards at end of year
282

 
$
29.77

 
241

 
$
25.50

 
$
150

 
$
22.19

Vested, but not issued at end of year (4)
81

 
$
15.44

 
—

 
$
—

 
$
—

 
$
—

(1) 
Presented at target level of performance.
(2) 
Includes the effect of a 20% DLOM on awards granted in each 2016, 2015 and 2014.
(3) 
2016 includes adjustments for achieving specific performance goals for PSUs granted in 2013.
(4) 
Represents PSUs with a delayed settlement date.

Savings and Retirement Plan

The Company has a defined contribution retirement plan, The PrivateBancorp, Inc. Savings, Retirement and Employee Stock Ownership Plan (the “KSOP”), which allows employees to make contributions up to 75% of compensation on a pre-tax basis and/or after-tax basis through salary deferrals under Section 401(k) of the Internal Revenue Code. At the employees’ direction, employee contributions are invested among a variety of investment alternatives, including pooled-separate accounts maintained by an insurance carrier, mutual funds of registered investment companies and Company common stock. For employees who have met a 1 year service requirement and make voluntary contributions to the KSOP, we contribute an amount equal to $0.50 for each dollar contributed up to 6% of an employee’s compensation (subject to certain maximum compensation amounts as prescribed in Internal Revenue Service guidance). The Company’s matching contribution vests in increments of 20% annually for each year in which 1,000 hours are worked. The KSOP also allows for a discretionary company contribution. Although no such contribution was made for 2016, 2015 or 2014, the discretionary component vests in increments of 20% annually over a period of 5 years based on the employee’s years of service.

KSOP Plan Information
(Amounts in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Company matching contribution
$
3,397

 
$
2,946

 
$
2,509

Number of Company shares held in KSOP
309

 
363

 
373

Fair value of Company shares held by KSOP
$
16,772

 
$
14,892

 
$
12,472

Dividends received on Company shares
$
14

 
$
15

 
$
16

Fair value of participant-directed investments in KSOP (1)
$
117,599

 
$
96,279

 
$
85,301

(1) 
Amounts reported include the fair value of Company shares held by KSOP disclosed above.


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Deferred Compensation Plan

We maintain a non-qualified deferred compensation plan (the “Plan”) which allows eligible participants to defer the receipt of cash compensation or non-employee director fees otherwise payable to them. The purpose of the Plan is to further our ability to attract and retain high quality executives and non-employee directors. Employees who participate in the Plan may elect to defer up to 50% of annual base salary and 100% of annual bonus amounts not subject to a mandatory deferral and directors may elect to defer up to 100% of his or her cash portion of director’s fees earned and paid during the Plan year. Participants elect at the time amounts that are deferred whether such deferral amounts will be credited with “earnings” as if they were invested in either a fixed income account with interest credited based on our prime rate (not to exceed 120% of the applicable federal long-term rate) on the cash value of the funds deposited, or in deferred stock units (“DSUs”) in Company stock with earnings credited in the form of dividends equivalent to that paid to our common stockholders. Except for an “earnings” credit on the deferred amounts, we do not provide any contributions or credits to participants under the Plan. At December 31, 2016 and 2015, there were 145,271 and 133,481 DSUs, respectively, in the Plan. At the time of distribution, amounts credited in DSUs are paid in shares of our common stock while amounts credited in the fixed income account are paid in cash. All elections and payments under the Plan are subject to compliance with requirements of Section 409A of the Internal Revenue Code which may limit elections and require delay in payment of benefits in certain circumstances.

16. REGULATORY AND CAPITAL MATTERS

The Company and the Bank are subject to various regulatory requirements that impose requirements or restrictions on cash reserves, loans or advances, and dividends. The Bank is required to maintain reserves against deposits. Reserves are held either in the form of vault cash or noninterest-bearing balances maintained with the FRB and are based on the average daily balances and statutory reserve ratios prescribed by the type of deposit account. Reserve balances required to be maintained at the FRB were $257.5 million and $199.4 million at December 31, 2016 and 2015, respectively.

Under current FRB regulations, the Bank is limited in the amount it may loan or advance to PrivateBancorp, Inc. on an unconsolidated basis (the “Parent Company”). Loans or advances to a single subsidiary may not exceed 10% of the Bank’s capital stock and surplus (as defined) and loans to all subsidiaries may not exceed 20%. Loans from the Bank to the Parent Company are also required to meet certain collateral requirements.

Various state banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank and the payment of such dividends is contingent upon a number of factors including the Bank’s ability to meet applicable regulatory capital requirements, the strength of the Bank’s balance sheet, the Bank’s profitability and earnings and the Bank’s ability to satisfy its obligations and support any projected growth. During 2016 and 2015, the Bank paid no dividends to the Parent Company. As of December 31, 2016, the Bank had the capacity under banking regulation to pay dividends of $967.3 million, subject to the Company’s internal capital policy.

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 risk-based capital, common equity Tier 1 and the total risk-based capital ratios, which are calculated based on 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 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.

As of December 31, 2016, the Company’s and the Bank’s capital position was in excess of all minimum regulatory capital adequacy requirements to which they are subject. As of December 31, 2016, the most recent regulatory notification classified the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes would change the Bank’s classification for this purpose. Failure to meet minimum capital requirements could result in certain mandatory, and possible discretionary, actions by regulators which, if undertaken, could have a material effect on our consolidated financial statements.


130

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

Capital Measurements
(Amounts in thousands)
 
Actual 
 
FRB Guidelines for
Minimum Regulatory
Capital
 
Regulatory Minimum
For “Well-Capitalized”
under FDICIA
 
Capital
 
Ratio
 
Capital
 
Ratio
 
Capital
 
Ratio
As of December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Regulatory capital ratios:
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,326,611

 
12.49
%
 
$
1,606,652

 
8.625
%
 
n/a

 
n/a

The PrivateBank
2,264,752

 
12.17

 
n/a

 
n/a

 
$
1,861,353

 
10.00
%
Tier 1 risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
1,998,280

 
10.73

 
1,234,095

 
6.625

 
n/a

 
n/a

The PrivateBank
2,057,081

 
11.05

 
n/a

 
n/a

 
1,489,082

 
8.00

Tier 1 leverage:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
1,998,280

 
10.28

 
777,777

 
4.000

 
n/a

 
n/a

The PrivateBank
2,057,081

 
10.59

 
n/a

 
n/a

 
971,400

 
5.00

Common equity Tier 1:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
1,830,630

 
9.83

 
954,677

 
5.125

 
n/a

 
n/a

The PrivateBank
2,057,081

 
11.05

 
n/a

 
n/a

 
1,209,879

 
6.50

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Regulatory capital ratios:
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,066,766

 
12.37
%
 
$
1,336,240

 
8.00
%
 
n/a

 
n/a

The PrivateBank
1,985,535

 
11.91

 
n/a

 
n/a

 
$
1,667,746

 
10.00
%
Tier 1 risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
1,763,559

 
10.56

 
1,002,180

 
6.00

 
n/a

 
n/a

The PrivateBank
1,807,328

 
10.84

 
n/a

 
n/a

 
1,334,197

 
8.00

Tier 1 leverage:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
1,763,559

 
10.35

 
681,670

 
4.00

 
n/a

 
n/a

The PrivateBank
1,807,328

 
10.62

 
n/a

 
n/a

 
850,746

 
5.00

Common equity Tier 1:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
1,593,780

 
9.54

 
751,635

 
4.50

 
n/a

 
n/a

The PrivateBank
1,807,337

 
10.84

 
n/a

 
n/a

 
1,084,035

 
6.50

n/a
Not applicable.

17. 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 risk (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 December 31, 2016 and 2015.


131

Notional Amounts and Fair Value of Derivative Instruments
(Amounts in thousands)

 
Asset Derivatives
 
Liability Derivatives
 
December 31, 2016
 
December 31, 2015
 
December 31, 2016
 
December 31, 2015
 
Notional
 
Fair
Value
 
Notional
 
Fair
Value
 
Notional
 
Fair
Value
 
Notional
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
350,000

 
$
1,873

 
$
675,000

 
$
5,366

 
$
—

 
$
—

 
$
125,000

 
$
799

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Client-related derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
4,490,888

 
$
31,871

 
$
3,933,977

 
$
41,734

 
$
4,490,888

 
$
32,058

 
$
3,933,977

 
$
43,001

Foreign exchange contracts
126,447

 
6,579

 
155,914

 
5,008

 
124,598

 
5,901

 
127,664

 
4,274

Risk participation agreements (1)
61,001

 
10

 
84,216

 
6

 
93,561

 
11

 
111,269

 
27

Total client-related derivatives
 
 
$
38,460

 
 
 
$
46,748

 
 
 
$
37,970

 
 
 
$
47,302

Other end-user derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
19,155

 
$
1,518

 
$
28,058

 
$
220

 
$
29,943

 
$
201

 
$
4,486

 
$
3

Mortgage banking derivatives
 
 
1,033

 
 
 
519

 
 
 
350

 
 
 
181

Warrants
 
 
263

 
 
 
—

 
 
 
—

 
 
 
—

Total other end-user derivatives
 
 
$
2,814

 
 
 
$
739

 
 
 
$
551

 
 
 
$
184

Total derivatives not designated as hedging instruments
 
 
$
41,274

 
 
 
$
47,487

 
 
 
$
38,521

 
 
 
$
47,486

Netting adjustments (2)
 
 
(15,182
)
 
 
 
(12,238
)
 
 
 
(20,399
)
 
 
 
(30,056
)
Total derivatives
 
 
$
27,965

 
 
 
$
40,615

 
 
 
$
18,122

 
 
 
$
18,229

(1) 
The remaining average notional amounts are shown for risk participation agreements.
(2) 
Represents netting of derivative asset and liability balances, and related cash collateral, with the same counterparty subject to master netting agreements. Refer to Note 18 for additional information regarding master netting agreements.
 
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.

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 December 31, 2016 and December 31, 2015. The fair value of the derivatives with credit contingency features in a net liability position at December 31, 2016 totaled $2.1 million and $1.0 million of collateral was posted for these transactions. If the credit risk contingency features were triggered at December 31, 2016, no additional collateral would be required to be posted to derivative counterparties and $2.1 million in outstanding derivative instruments would be immediately settled.

Derivatives Designated in Hedge Relationships

We 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. 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 loan cash flows 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

132

income. During the year ended December 31, 2016, 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 December 31, 2016, the maximum length of time over which forecasted interest cash flows are hedged is approximately four years. As of December 31, 2016, $2.3 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 December 31, 2016. There are no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to our cash flow hedge strategy.

During the year ended December 31, 2016, 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. Refer to Note 12 for additional information regarding the changes in AOCI related to the interest rate swaps designated as cash flow hedges.

Derivatives Not Designated in Hedge Relationships

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 our clients enter into an interest rate or foreign exchange derivative transaction with us, we generally 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)

 
December 31,
 
2016
 
2015
Fair value of written RPAs
$
11

 
$
27

Range of remaining terms to maturity (in years)
Less than 1 to 5

 
Less than 1 to 5

Range of assigned internal risk ratings
2 to 7

 
2 to 7

Maximum potential amount of future undiscounted payments
$
4,107

 
$
3,937

Percent of maximum potential amount of future undiscounted payments covered by proceeds from liquidation of pledged collateral
65
%
 
43
%

Other End-User Derivatives – We use forward commitments to sell to-be-announced securities and other commitments to sell residential mortgage loans at specified prices to economically hedge the change in fair value of customer interest rate lock commitments and residential mortgage loans held-for-sale. The forward commitments to sell and the interest rate lock commitments

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are considered derivatives. At December 31, 2016, the par value of our residential mortgage loans held-for-sale totaled $25.4 million, the notional value of our interest rate lock commitments totaled $37.4 million, and the notional value of our forward commitments to sell totaled $85.9 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 December 31, 2016, our exposure was to the Euro, Canadian dollar, Danish kroner, British pound and Australian dollar on $38.4 million of loans. We manage this risk using forward currency derivatives.

Additionally, in connection with certain negotiated credit facilities, we receive warrants to acquire stock in privately-held client companies and are considered derivatives under current accounting standards. As of December 31, 2016, warrants totaled $263,000.

Gain (Loss) Recognized on Derivative Instruments
Not Designated in Hedging Relationship
(Amounts in thousands)
 
 
Location in Consolidated Statements of Income
 
Year Ended December 31,
 
 
 
2016
 
2015
 
2014
Gain (loss) on client-related derivatives:
 
 
 
 
 
 
 
Interest rate contracts
Capital markets income
 
$
17,952

 
$
9,974

 
$
10,634

Foreign exchange contracts
Capital markets income
 
7,351

 
8,327

 
7,068

Risk participation agreements
Capital markets income
 
20

 
229

 
345

Total client-related derivatives
 
 
25,323

 
18,530

 
18,047

Gain (loss) on end-user derivatives:
 
 
 
 
 
 
 
Foreign exchange derivatives
Other income, service and charges income
 
4,280

 
1,907

 
1,402

Mortgage banking derivatives
Mortgage banking income
 
(82
)
 
264

 
(253
)
Warrants
Other income, service and charges income
 
64

 
—

 
—

Total end-user derivatives
 
 
4,262

 
2,171

 
1,149

Total gain recognized on derivatives not designated in hedging relationship
 
 
$
29,585

 
$
20,701

 
$
19,196


18. BALANCE SHEET OFFSETTING

Master Netting Agreements

Certain financial instruments, including repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to enforceable master netting or similar agreements. Authoritative accounting guidance permits the netting of financial assets and liabilities when a legally enforceable master netting agreement exists between us and a counterparty. A master netting agreement is an agreement between two counterparties who have multiple financial 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 financial instruments subject to enforceable master netting agreements, assets and liabilities, and related cash collateral, with the same counterparty are reported on a net basis within the assets and liabilities on the consolidated statements of financial condition.

Derivative contracts may require us 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. We have 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 December 31, 2016 and 2015. Certain collateral posting requirements are subject to posting thresholds and minimum transfer amounts, such that we are 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 December 31, 2016 and 2015, $5.2 million and $17.8 million of cash collateral pledged, respectively, was netted with the related financial liabilities on the consolidated statement of financial condition. To the extent not netted against fair values under

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a master netting agreement, the excess collateral received or pledged is included in other short-term borrowings or other investments, respectively. There was no excess cash collateral pledged at December 31, 2016 and 2015. Any securities pledged to counterparties as financial instrument collateral remain on the consolidated statements of financial condition as long as we do not default.

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

Offsetting of Financial Assets and Liabilities
(Amounts in thousands)
 
 
Gross Amounts of Recognized Assets / Liabilities
 
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, 2016
 
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Derivatives (1):
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
33,744

 
$
(11,828
)
 
$
21,916

 
$
(2,424
)
 
$
—

 
$
19,492

Foreign exchange contracts
6,296

 
(3,321
)
 
2,975

 
—

 
—

 
2,975

Risk participation agreements
10

 
—

 
10

 
—

 
—

 
10

Mortgage banking derivatives
449

 
(33
)
 
416

 
—

 
—

 
416

Total derivatives subject to a master netting agreement
40,499

 
(15,182
)
 
25,317

 
(2,424
)
 
—

 
22,893

Total derivatives not subject to a master netting agreement
2,648

 
—

 
2,648

 
—

 
—

 
2,648

Total derivatives
$
43,147

 
$
(15,182
)
 
$
27,965

 
$
(2,424
)
 
$
—

 
$
25,541

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivatives (1):
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
32,058

 
$
(18,719
)
 
$
13,339

 
$
(1,229
)
 
$
—

 
$
12,110

Foreign exchange contracts
2,983

 
(1,647
)
 
1,336

 
(123
)
 
—

 
1,213

Risk participation agreements
11

 
—

 
11

 
(1
)
 
—

 
10

Mortgage banking derivatives
33

 
(33
)
 
—

 
—

 
—

 
—

Total derivatives subject to a master netting agreement
35,085

 
(20,399
)
 
14,686

 
(1,353
)
 
—

 
13,333

Total derivatives not subject to a master netting agreement
3,436

 
—

 
3,436

 
—

 
—

 
3,436

Total derivatives
$
38,521

 
$
(20,399
)
 
$
18,122

 
$
(1,353
)
 
$
—

 
$
16,769

(1) 
All derivative contracts are over-the-counter contracts.
(2) 
Represents financial instrument 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 financial instrument.
(4) 
Financial instruments are disclosed at fair value. Financial instrument collateral is allocated pro-rata amongst the derivative liabilities to which it relates.
 

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

 
Gross Amounts of Recognized Assets / Liabilities
 
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, 2015
 
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Derivatives (1):
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
47,100

 
$
(8,970
)
 
$
38,130

 
$
(55
)
 
$
—

 
$
38,075

Foreign exchange contracts
4,059

 
(3,254
)
 
805

 
(88
)
 
—

 
717

Risk participation agreements
6

 
—

 
6

 
—

 
—

 
6

Mortgage banking derivatives
34

 
(14
)
 
20

 
—

 
—

 
20

Total derivatives subject to a master netting agreement
51,199

 
(12,238
)
 
38,961

 
(143
)
 
—

 
38,818

Total derivatives not subject to a master netting agreement
1,654

 
—

 
1,654

 
—

 
—

 
1,654

Total derivatives
$
52,853

 
$
(12,238
)
 
$
40,615

 
$
(143
)
 
$
—

 
$
40,472

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivatives (1):
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
43,800

 
$
(28,574
)
 
$
15,226

 
$
(10,475
)
 
$
—

 
$
4,751

Foreign exchange contracts
2,287

 
(1,458
)
 
829

 
(570
)
 
—

 
259

Risk participation agreements
27

 
(10
)
 
17

 
(12
)
 
—

 
5

Mortgage banking derivatives
14

 
(14
)
 
—

 
—

 
—

 
—

Total derivatives subject to a master netting agreement
46,128

 
(30,056
)
 
16,072

 
(11,057
)
 
—

 
5,015

Total derivatives not subject to a master netting agreement
2,157

 
—

 
2,157

 
—

 
—

 
2,157

Total derivatives
$
48,285

 
$
(30,056
)
 
$
18,229

 
$
(11,057
)
 
$
—

 
$
7,172

(1) 
All derivative contracts are over-the-counter contracts.
(2) 
Represents financial instrument 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 financial instrument.
(4) 
Financial instruments are disclosed at fair value. Financial instrument collateral is allocated pro-rata amongst the derivative liabilities to which it relates.

19. 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.


136

Contractual or Notional Amounts of Financial Instruments (1) 
(Amounts in thousands)

 
December 31,
 
2016
 
2015
Commitments to extend credit:
 
 
 
Home equity lines
$
14,880

 
$
1,338

Credit card lines
6,314

 
—

Residential 1-4 family construction
89,787

 
47,504

Commercial real estate, other construction, and land development
1,387,823

 
1,321,123

Commercial and industrial
3,889,323

 
4,191,895

All other commitments
1,052,254

 
508,096

Total commitments to extend credit
$
6,440,381

 
$
6,069,956

Letters of credit:
 
 
 
Financial standby
$
330,350

 
$
365,760

Performance standby
39,068

 
38,264

Commercial letters of credit
3,627

 
3,999

Total letters of credit
$
373,045

 
$
408,023

(1) 
Includes covered loan commitments of $9.0 million and $9.7 million as of December 31, 2016 and 2015, respectively.

Commitments to extend credit are agreements to lend funds to, or issue letters of credit for the account of, a client as long as there is no violation of any condition established in the credit 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 unfunded commitments require regulatory capital support, except for unfunded commitments of less than one year that are 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 December 31, 2016, we had a reserve for unfunded commitments of $17.1 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 upon 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 CRE, physical plant and property, inventory, receivables, cash and marketable securities.

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 $1.7 million as of December 31, 2016. We amortize these amounts into income over the commitment period. As of December 31, 2016, 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.


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Other Commitments

The Company has unfunded commitments to CRA investments and other investment partnerships totaling $45.4 million at December 31, 2016. Of these commitments, $35.9 million related to legally-binding unfunded commitments for tax-credit investments and was included on the consolidated statements of financial condition within other liabilities and included within other assets as part of the carrying value of the investments.

Credit Card Settlement Guarantees

Our third-party corporate credit card provider 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 provider. However, in certain circumstances, we may enter into a recourse agreement, which transfers the credit risk from the third-party provider 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 $21.3 million at December 31, 2016.

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 December 31, 2016, 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 in the secondary market have limited recourse provisions. The losses for the years ended December 31, 2016 and 2015 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

Following the announcement of the proposed transaction with CIBC, three putative class actions were filed on behalf of our public stockholders in the Circuit Court of Cook County, Chicago, Illinois. The three actions have been consolidated and styled In re PrivateBancorp, Inc. Shareholder Litigation, 2016-CH-08949. All of the actions name as defendants the Company and each of its directors individually, and assert that the directors breached their fiduciary duties in connection with the proposed transaction. Two of the complaints are also brought against CIBC and assert that the Company and CIBC aided and abetted the directors’ alleged breaches. The actions broadly allege that the transaction was the result of a flawed process, that the price is unfair, and that certain provisions of the merger agreement might dissuade a potential suitor from making a competing offer, among other things. The plaintiffs subsequently filed an amended complaint, adding a claim alleging breaches of the fiduciary duty of disclosure by the directors. Plaintiffs seek injunctive and other relief, including damages. The plaintiffs in the three actions have agreed in principle not to pursue the actions as a result of the inclusion of certain additional disclosures in the proxy statement for the Company’s special meeting of stockholders. The defendants, including the Company, believe the demands and complaints are without merit and there are substantial legal and factual defenses to the claims asserted, and the proxy statement for the special meeting disclosed all material information prior to the inclusion of the additional disclosures.

As of December 31, 2016, and in the ordinary course of business, there were various other legal proceedings pending against the Company and our subsidiaries that are incidental to our regular business operations. Management does not believe that the outcome of any of these proceedings will have, individually or in the aggregate, a material adverse effect on our business, results of operations, financial condition or cash flows.

20. 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.


138

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 generally classified in level 2 of the valuation hierarchy. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as level 3. 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.

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.

Residential Real Estate Loans Fair Value Option – Residential real estate loans fair value option represent residential real estate loans that originated as held-for-sale and subsequently transferred to loans held-for-investment. Similar to the mortgage loans held-for-sale, we have elected the fair value option for these loans. These residential real estate 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 these residential real estate loans 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. Residential real estate loans fair value option are classified in level 2 of the valuation hierarchy.


139

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. 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 appraisal. If the most recent appraisal is greater than one-year old, a new evaluation of the underlying collateral is obtained. For collateral-dependent impaired loans that are secured by real estate, we generally obtain "as is" appraisal values to evaluate impairment. When a collateral-dependent loan is secured by non-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 workout and/or asset-based specialists for reasonableness of estimated liquidation costs, collectability probabilities, and other market data. Appraisals for real estate 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 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 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. Accordingly, these fair value estimates are classified in level 3 of the valuation hierarchy.

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, 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, or based on quoted market prices obtained from external pricing services. 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, RPAs, and interest rate lock commitments and warrants, 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 parties based on our validation procedures, during the years ended December 31, 2016 and 2015, we did not alter the fair values ultimately provided by the third-party advisors.


140

Level 3 derivatives include RPAs, derivatives associated with clients whose loans are risk-rated 6 or higher (“watch list derivative”), interest rate lock commitments and warrants. Refer to “Credit Quality Indicators” in Note 4 for further discussion of risk ratings.

For the level 3 RPAs and watch list 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 RPAs 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 RPAs 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.

For the interest rate lock commitments on mortgage loans, the fair value is based on prices obtained for loans with similar characteristics from third-party sources, adjusted for the probability that the interest rate lock commitment will fund (the “pull-through” rate). The significant unobservable input that causes these derivatives to be classified in level 3 of the fair value hierarchy is the pull-through rate. Pull-through rates are derived using the Company’s historical data and reflect the Company’s best estimate of the likelihood that a committed loan will ultimately fund. Significant increases in this input in isolation would result in a significantly higher fair value measurement and significant decreases would result in a significantly lower fair value measurement.

The fair value of our warrants to acquire stock in privately-held client companies is based on a Black-Scholes option pricing model that estimates the asset value by using stated strike prices, estimated stock prices, option expiration dates, risk-free interest rates based on a duration-matched U.S. Treasury rate, and option volatility assumptions. The significant unobservable inputs that cause these derivatives to be classified in level 3 of the fair value hierarchy are the estimated stock prices, adjustments to the option expiration dates, and option volatility assumptions. The estimated stock prices are based on the most recent valuation of the privately-held client company, adjusted as deemed appropriate for changes in relevant market conditions. Option expiration dates are modified to account for the estimated actual remaining life relative to the stated expiration of the warrants. The option volatility assumptions are based on the volatility of publicly-traded companies that operate in similar industries as the privately-held client companies. Significant increases in these inputs in isolation would result in a significantly higher fair value measurement and significant decreases would result in a significantly lower fair value measurement.


141

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 December 31, 2016 and 2015 on a recurring basis.

Fair Value Measurements on a Recurring Basis
(Amounts in thousands)
 
 
December 31, 2016
 
December 31, 2015
 
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
$
542,295

 
$
—

 
$
—

 
$
542,295

 
$
321,651

 
$
—

 
$
—

 
$
321,651

U.S. Agencies
—

 
45,940

 
—

 
45,940

 
—

 
46,098

 
—

 
46,098

Collateralized mortgage obligations
—

 
75,345

 
—

 
75,345

 
—

 
99,972

 
—

 
99,972

Residential mortgage-backed securities
—

 
886,550

 
—

 
886,550

 
—

 
829,855

 
—

 
829,855

State and municipal securities
—

 
463,395

 
—

 
463,395

 
—

 
467,160

 
630

 
467,790

Total securities available-for-sale
542,295

 
1,471,230

 
—

 
2,013,525

 
321,651

 
1,443,085

 
630

 
1,765,366

Mortgage loans held-for-sale
—

 
24,934

 
—

 
24,934

 
—

 
35,704

 
—

 
35,704

Residential real estate loans (1)
—

 
1,029

 
—

 
1,029

 
—

 
—

 
—

 
—

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

 
1,873

 
—

 
1,873

 
—

 
5,366

 
—

 
5,366

Client-related derivatives
—

 
37,612

 
848

 
38,460

 
—

 
46,342

 
406

 
46,748

Other end-user derivatives
—

 
1,967

 
847

 
2,814

 
—

 
254

 
485

 
739

Netting adjustments
—

 
(15,182
)
 
—

 
(15,182
)
 
—

 
(12,167
)
 
(71
)
 
(12,238
)
Total derivative assets
—

 
26,270

 
1,695

 
27,965

 
—

 
39,795

 
820

 
40,615

Total assets
$
542,295

 
$
1,523,463

 
$
1,695

 
$
2,067,453

 
$
321,651

 
$
1,518,584

 
$
1,450

 
$
1,841,685

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

 
$
—

 
$
—

 
$
—

 
$
—

 
$
799

 
$
—

 
$
799

Client-related derivatives
—

 
37,959

 
11

 
37,970

 
—

 
47,204

 
98

 
47,302

Other end-user derivatives
—

 
234

 
317

 
551

 
—

 
17

 
167

 
184

Netting adjustments
—

 
(20,399
)
 
—

 
(20,399
)
 
—

 
(29,974
)
 
(82
)
 
(30,056
)
Total derivative liabilities
$
—

 
$
17,794

 
$
328

 
$
18,122

 
$
—

 
$
18,046

 
$
183

 
$
18,229

 
(1) 
Represents loans accounted for under the fair value option.
 
If a change in valuation techniques, input assumptions or market observability/liquidity 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, 2015 and December 31, 2016.

142

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, 2015 to December 31, 2016.

Reconciliation of Beginning and Ending Fair Value for Those
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (1) 
(Amounts in thousands)
 
 
December 31, 2016
 
December 31, 2015
 
Available- for-Sale Securities
 
 Derivative Assets
 
 Derivative (Liabilities)
 
Available- for-Sale Securities
 
 Derivative Assets
 
 Derivative (Liabilities)
Balance at beginning of year
$
630

 
$
891

 
$
(265
)
 
$
—

 
$
2,198

 
$
(1,477
)
Total gains (losses):
 
 
 
 
 
 
 
 
 
 
 
Included in earnings (2)
30

 
621

 
(641
)
 
—

 
(306
)
 
226

Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
 
 
 
 
Issuances
—

 
2,310

 
—

 
—

 
1,198

 
—

Settlements
(660
)
 
(3,014
)
 
501

 
(341
)
 
(2,261
)
 
687

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

 
1,228

 
—

 
971

 
1,456

 
(160
)
Transfers out of Level 3 (into Level 2) (3)
—

 
(341
)
 
77

 
—

 
(1,394
)
 
459

Balance at end of year
$
—

 
$
1,695

 
$
(328
)
 
$
630

 
$
891

 
$
(265
)
Change in unrealized gains (losses) in earnings relating to assets and liabilities still held at end of year
$
—

 
$
89

 
$
(8
)
 
$
(341
)
 
$
445

 
$
240

 
(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 and mortgage banking income for interest rate lock commitments.
(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.

Financial Instruments Recorded Using the Fair Value Option

Difference Between Aggregate Fair Value and Aggregate Remaining Principal Balance
for Loans Elected to be Carried at Fair Value
(Amounts in thousands)

 
Aggregate Fair Value
 
Aggregate Unpaid Principal Balance
 
Difference (1)
As of December 31, 2016
 
 
 
 
 
Mortgage loans held-for-sale
$
24,934

 
$
25,424

 
$
(490
)
Residential real estate loans fair value option
1,029

 
991

 
38

As of December 31, 2015
 
 
 
 
 
Mortgage loans held-for-sale
$
35,704

 
$
36,005

 
$
(301
)
(1) 
The change in fair value is reflected in mortgage banking non-interest income.

As of December 31, 2016 and 2015, 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 year ended December 31, 2016 were not material.


143

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 years ended December 31, 2016 and 2015 and still held at December 31, 2016 and 2015, 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 (Gains) Losses
 
December 31,
 
For the Year Ended
 
2016
 
2015
 
2016
 
2015
Collateral-dependent impaired loans (1)
$
25,885

 
$
21,082

 
$
(10,169
)
 
$
(491
)
OREO (2)
10,165

 
3,202

 
2,326

 
961

Total
$
36,050

 
$
24,284

 
$
(7,843
)
 
$
470

(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.

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, 2015 to December 31, 2016.

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
December 31, 2016
 
Valuation Technique(s)
 
Unobservable
Input
 
Range
 
Weighted
Average
Watch list derivatives
 
$
838

 
Discounted cash flow
 
Loss factors
 
12.5% to 29.4%
 
22.4
 %
RPAs
 
(1
)
(1) 
Discounted cash flow
 
Loss factors
 
0.1% to 23.9%
 
1.8
 %
Interest rate lock commitments
 
(744
)
 
Discounted cash flow
 
Pull-through rate
 
72.2% to 100.0%
 
82.6
 %
Collateral-dependent impaired loans
 
25,885

 
Sales comparison, income capitalization and/or cost approach
 
Property specific adjustment
 
-79.2% to 22.6%
 
-45.5
 %
OREO
 
10,165

 
Sales comparison, income capitalization and/or cost approach
 
Property specific adjustment
 
-0.5% to -83.3%
 
-18.4
 %
Warrants
 
263

 
Black-Scholes option pricing model
 
Estimated stock price
 
$0.59 to $13.97
 
$
9.13

Remaining life assumption
 
9 to 10 years
 
9.2 years

Volatility
 
27.0% to 64.0%
 
52.1
 %
(1) 
Represents fair value of underlying swap.

144


The significant unobservable inputs used in the fair value measurement of the watch list derivatives and RPAs are the historic loss factors. An increase (decrease) in the pertinent loss factor would result in a 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.

Other loans held-for-sale - Included in loans held-for-sale at December 31, 2016 and 2015 are $78.4 million and $73.1 million, respectively, of loans carried at the lower of aggregate 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, 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, and can only be sold to the FHLB or another member institution at par.

Loans – Other than certain residential real estate loans accounted for under the fair value option, 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 share 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.

145


Community reinvestment investments - The fair values of these instruments were estimated using an income approach (discounted cash flow) that incorporates current market rates.

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 certificates of deposit and time deposits were estimated using present value techniques by discounting the future cash flows at rates based on internal models and broker quotes.

Short-term 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 the repurchase obligation is considered to be equal to the carrying value because of its short-term nature. The fair value of secured borrowings and other 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.


146

Financial Instruments
(Amounts in thousands)

 
Carrying Amount
 
 
 
Fair Value Measurements Using
 
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
As of December 31, 2016
 
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
161,168

 
$
161,168

 
$
161,168

 
$
—

 
$
—

Federal funds sold and interest-bearing deposits in banks
587,563

 
587,563

 
—

 
587,563

 
—

Loans held-for-sale
103,284

 
103,284

 
—

 
103,284

 
—

Securities available-for-sale
2,013,525

 
2,013,525

 
542,295

 
1,471,230

 
—

Securities held-to-maturity
1,738,123

 
1,714,770

 
—

 
1,714,770

 
—

FHLB stock
54,163

 
54,163

 
—

 
54,163

 
—

Loans, net of allowance for loan losses and unearned fees
14,870,476

 
14,805,811

 
—

 
1,029

 
14,804,782

Covered assets, net of allowance for covered loan losses
17,297

 
21,928

 
—

 
—

 
21,928

Accrued interest receivable
57,986

 
57,986

 
—

 
—

 
57,986

Investment in BOLI
58,115

 
58,115

 
—

 
—

 
58,115

Derivative assets
27,965

 
27,965

 
—

 
26,270

 
1,695

Community reinvestment investments
7,060

 
8,522

 
—

 
8,522

 
—

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
16,065,229

 
$
16,060,784

 
$
—

 
$
13,724,218

 
$
2,336,566

Short-term borrowings
1,544,746

 
1,544,128

 
—

 
1,539,384

 
4,744

Long-term debt
338,310

 
319,199

 
197,599

 
52,770

 
68,830

Accrued interest payable
9,063

 
9,063

 
—

 
—

 
9,063

Derivative liabilities
18,122

 
18,122

 
—

 
17,794

 
328

As of December 31, 2015
 
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
145,147

 
$
145,147

 
$
145,147

 
$
—

 
$
—

Federal funds sold and interest-bearing deposits in banks
238,511

 
238,511

 
—

 
238,511

 
—

Loans held-for-sale
108,798

 
108,798

 
—

 
108,798

 
—

Securities available-for-sale
1,765,366

 
1,765,366

 
321,651

 
1,443,085

 
630

Securities held-to-maturity
1,355,283

 
1,351,241

 
—

 
1,351,241

 
—

FHLB stock
26,613

 
26,613

 
—

 
26,613

 
—

Loans, net of allowance for loan losses and unearned fees
13,105,739

 
12,929,340

 
—

 
—

 
12,929,340

Covered assets, net of allowance for covered loan losses
21,242

 
26,758

 
—

 
—

 
26,758

Accrued interest receivable
45,482

 
45,482

 
—

 
—

 
45,482

Investment in BOLI
56,653

 
56,653

 
—

 
—

 
56,653

Derivative assets
40,615

 
40,615

 
—

 
39,795

 
820

Community reinvestment investments
15,602

 
15,812

 
—

 
15,812

 
—

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
14,345,592

 
$
14,348,272

 
$
—

 
$
12,155,516

 
$
2,192,756

Short-term borrowings
372,467

 
372,451

 
—

 
370,244

 
2,207

Long-term debt
688,215

 
669,210

 
207,750

 
398,146

 
63,314

Accrued interest payable
7,080

 
7,080

 
—

 
—

 
7,080

Derivatives liabilities
18,229

 
18,229

 
—

 
18,046

 
183



147

21. OPERATING SEGMENTS

We have three primary operating segments: Banking, Asset Management and the Holding Company. With respect to the Banking and Asset Management segments, each is delineated by the products and services that it 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. Transactions between operating segments are primarily conducted at fair value, resulting in profits that are eliminated from consolidated results of operations.

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)

 
Banking
 
Asset Management
 
Holding Company
and Other
Adjustments (1)
 
Consolidated
Year Ended December 31,
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
Net interest income (expense)
$
600,956

 
$
4,408

 
$
(22,938
)
 
$
582,426

Provision for loan and covered loan losses
33,710

 
—

 
—

 
33,710

Non-interest income
127,787

 
19,897

 
74

 
147,758

Non-interest expense
336,982

 
17,406

 
18,085

 
372,473

Income (loss) before income taxes
358,051

 
6,899

 
(40,949
)
 
324,001

Income tax provision (benefit)
129,201

 
2,656

 
(16,213
)
 
115,644

Net income (loss)
$
228,850

 
$
4,243

 
$
(24,736
)
 
$
208,357

Assets
$
17,893,329

 
$
—

 
$
2,160,444

 
$
20,053,773

Total loans
15,056,241

 
—

 
—

 
15,056,241

Deposits
16,118,043

 
—

 
(52,814
)
 
16,065,229

2015
 
 
 
 
 
 
 
Net interest income (expense)
$
532,497

 
$
4,315

 
$
(22,397
)
 
$
514,415

Provision for loan and covered loan losses
14,790

 
—

 
—

 
14,790

Non-interest income
111,961

 
17,989

 
62

 
130,012

Non-interest expense
304,991

 
17,030

 
11,216

 
333,237

Income (loss) before income taxes
324,677

 
5,274

 
(33,551
)
 
296,400

Income tax provision (benefit)
121,784

 
2,041

 
(12,736
)
 
111,089

Net income (loss)
$
202,893

 
$
3,233

 
$
(20,815
)
 
$
185,311

Assets
$
15,321,374

 
$
—

 
$
1,931,474

 
$
17,252,848

Total loans
13,266,475

 
—

 
—

 
13,266,475

Deposits
14,407,127

 
—

 
(61,535
)
 
14,345,592


148

Operating Segments Performance (Continued)
(Amounts in thousands)
 
 
Banking
 
Asset Management
 
Holding Company
and Other
Adjustments (1)
 
Consolidated
Year Ended December 31,
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
Net interest income (expense)
$
481,084

 
$
3,363

 
$
(29,710
)
 
$
454,737

Provision for loan and covered loan losses
12,044

 
—

 
—

 
12,044

Non-interest income
100,259

 
17,271

 
60

 
117,590

Non-interest expense
284,726

 
16,554

 
10,796

 
312,076

Income (loss) before income taxes
284,573

 
4,080

 
(40,446
)
 
248,207

Income tax provision (benefit)
109,088

 
1,606

 
(15,566
)
 
95,128

Net income (loss)
$
175,485

 
$
2,474

 
$
(24,880
)
 
$
153,079

Assets
$
13,882,805

 
$
—

 
$
1,713,919

 
$
15,596,724

Total loans
11,892,219

 
—

 
—

 
11,892,219

Deposits, excluding deposits held-for-sale
13,150,600

 
—

 
(60,632
)
 
13,089,968

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

The Company is required to consolidate VIEs in which it has a controlling financial interest. The following table summarizes the carrying amounts of the consolidated VIEs’ assets included in the Company’s statements of financial condition as adjusted for intercompany eliminations at December 31, 2016. At December 31, 2015, the Company did not have any VIEs that were consolidated in our financial statements.

Consolidated VIEs
(Amounts in thousands)
 
 
December 31, 2016
Assets:
 
Loans
$
17,774

Accrued interest receivable
66

Total assets
$
17,840


The Company sponsors and consolidates certain VIEs that invest in community development projects designed primarily to promote community welfare, such as economic rehabilitation and development of low-income areas by providing housing, services, or jobs for residents. These VIEs invest in community development projects through the extension of below-market loans that generate a return primarily through the realization of federal new markets tax credits. The consolidated VIEs’ loans are recognized within loans on the Company’s consolidated statements of financial condition. The federal new markets tax credits earned from equity investments in VIEs are recognized as a component of income tax expense, and interest income received on the loans is recognized within interest income on the Company’s consolidated statements of income. The assets of the consolidated VIEs are the primary source of funds to settle their respective obligations. The creditors of the VIEs do not have recourse to the general credit of the Company. The Company’s exposure to each consolidated VIE is limited to the amount of equity invested by the Company in the VIE.


149

The table below presents our interests in VIEs that are not consolidated in our financial statements at December 31, 2016 and 2015.

Nonconsolidated VIEs
(Amounts in thousands)

 
December 31, 2016
 
December 31, 2015
 
Carrying
Amount
 
Maximum
Exposure
to Loss
 
Carrying
Amount
 
Maximum
Exposure
to Loss
Trust preferred capital securities issuances (1)
$
167,651

 
$
—

 
$
167,609

 
$
—

Community reinvestment investments and loans (2)
55,560

 
64,668

 
44,894

 
48,065

Restructured loans to commercial clients (2):
 
 
 
 
 
 
 
Outstanding loan balance
102,709

 
116,134

 
47,178

 
56,854

Related derivative asset
74

 
74

 
81

 
81

Warrants
35

 
35

 
—

 
—

Total
$
326,029

 
$
180,911

 
$
259,762

 
$
105,000

(1) 
Net of deferred financing costs of $2.1 million and $2.2 million at December 31, 2016 and 2015 respectively.
(2) 
Excludes personal loans and loans to non-for-profit entities.

Trust preferred capital securities issuances – As discussed in Note 11, 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 therefrom in debentures issued by the Company. The trusts’ only assets are 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.

CRA investments and loans – We hold certain investments and loans that make investments to further our CRA initiatives. CRA investments are included within other assets and loans are included within loans in our consolidated statements of financial condition. Certain of these investments and loans meet the definition of a VIE, but the Company is not the primary beneficiary as we are a limited investor and do not have the power to direct their investment activities. Accordingly, we will continue to account for our interests in these investments and loans 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 CRA 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 2029. Any new investments in qualified affordable housing projects entered into on or after January 1, 2014, that meet certain conditions are accounted for using the proportional amortization method. Prior to January 1, 2014, the Company accounted for all of its investments in qualified affordable housing projects using the effective yield method and has elected to continue accounting for preexisting tax credit investments using the effective yield method as permitted under the accounting standards.

The carrying value of the Company’s tax credit investments in affordable housing projects totaled $42.9 million and $27.0 million as of December 31, 2016 and 2015, respectively. Commitments to provide future capital contributions totaling $35.9 million as of December 31, 2016, are expected to be paid through 2031. These investments are reviewed periodically for impairment. No impairment losses were recorded for the years ended December 31, 2016 and 2015. The following table summarizes the impact on the consolidated statement of income for the periods presented.

Affordable Housing Tax Credit Investments
(Amounts in thousands)
 
 
Year Ended December 31,
 
2016
 
2015
Tax credits
$
1,546

 
$
649

Tax benefits from operating losses
811

 
245

Amortization of principal investment
$
1,889

 
$
655


150


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 restructuring, 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 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.
 
23. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS

The following represents the condensed financial statements of PrivateBancorp, Inc., the parent company.

Statements of Financial Condition
(Parent Company only)
(Amounts in thousands)

 
December 31,
 
2016
 
2015
Assets
 
 
 
Cash and interest-bearing deposits
$
52,814

 
$
61,535

Investment in and advances to subsidiaries
2,149,164

 
1,915,546

Other assets
13,528

 
15,928

Total assets
$
2,215,506

 
$
1,993,009

Liabilities and Equity
 
 
 
Long-term debt
$
288,310

 
$
288,215

Accrued expenses and other liabilities
7,521

 
5,843

Equity
1,919,675

 
1,698,951

Total liabilities and equity
$
2,215,506

 
$
1,993,009



151

Statements of Income
(Parent Company only)
(Amounts in thousands)

 
Year Ended December 31,
 
2016
 
2015
 
2014
Income
 
 
 
 
 
Dividends from subsidiaries
$
—

 
$
—

 
$
100,000

Interest income
2

 
3

 
3

Securities transactions and other income
262

 
249

 
60

Total income
264

 
252

 
100,063

Expenses
 
 
 
 
 
Interest expense
18,530

 
18,082

 
26,348

Salaries and employee benefits
5,696

 
5,372

 
5,672

Other expenses
12,577

 
6,026

 
5,123

Total expenses
36,803

 
29,480

 
37,143

(Loss) income before income taxes and equity in undistributed income of subsidiaries
(36,539
)
 
(29,228
)
 
62,920

Income tax benefit
14,515

 
11,065

 
14,242

(Loss) income before undistributed income of subsidiaries
(22,024
)
 
(18,163
)
 
77,162

Equity in undistributed income of subsidiaries
230,381

 
203,474

 
75,917

Net income available to common stockholders
$
208,357

 
$
185,311

 
$
153,079



152

Statements of Cash Flows
(Parent Company only)
(Amounts in thousands)

 
Year Ended December 31,
 
2016
 
2015
 
2014
Operating Activities
 
 
 
 
 
Net income
$
208,357

 
$
185,311

 
$
153,079

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
Equity in undistributed income from subsidiaries
(230,381
)
 
(203,474
)
 
(75,917
)
Share-based compensation expense
1,859

 
1,744

 
2,072

Depreciation of premises, furniture and equipment
43

 
43

 
43

Excess tax benefit from exercise of stock options and vesting of restricted shares
(742
)
 
(1,388
)
 
(1,147
)
Net decrease in other assets
3,099

 
3,937

 
877

Net increase (decrease) in other liabilities
1,726

 
1,152

 
2,398

Net cash (used in) provided by operating activities
(16,039
)
 
(12,675
)
 
81,405

Investing Activities
—

 
—

 
—

Financing Activities
 
 
 
 
 
Repayment of long-term debt
—

 
—

 
(75,005
)
Stock repurchased in connection with benefit plans
(4,765
)
 
(5,982
)
 
(5,330
)
Cash dividends paid
(3,194
)
 
(3,151
)
 
(3,125
)
Proceeds from exercise of stock options and issuance of common stock under benefit plans
15,277

 
21,323

 
5,598

Excess tax benefit from exercise of stock options and vesting of restricted shares
—

 
1,388

 
1,147

Net cash provided by (used in) financing activities
7,318

 
13,578

 
(76,715
)
Net (decrease) increase in cash and cash equivalents
(8,721
)
 
903

 
4,690

Cash and cash equivalents at beginning of year
61,535

 
60,632

 
55,942

Cash and cash equivalents at end of year
$
52,814

 
$
61,535

 
$
60,632



153

24. QUARTERLY EARNINGS PERFORMANCE (UNAUDITED)

Quarterly Earnings Performance (1) 
(Dollars in thousands, except per share data)

 
2016
 
2015
 
Fourth
 
Third
 
Second
 
First
 
Fourth
 
Third
 
Second
 
First
Interest income
$
177,912

 
$
166,883

 
$
162,123

 
$
158,100

 
$
154,243

 
$
148,119

 
$
141,477

 
$
138,373

Interest expense
22,531

 
21,373

 
20,106

 
18,582

 
17,652

 
16,910

 
16,855

 
16,380

Net interest income
155,381

 
145,510

 
142,017

 
139,518

 
136,591

 
131,209

 
124,622

 
121,993

Provision for loan and covered loan losses
6,048

 
15,691

 
5,569

 
6,402

 
2,831

 
4,197

 
2,116

 
5,646

Fee revenue
39,412

 
37,614

 
36,550

 
33,071

 
32,619

 
30,529

 
33,060

 
32,982

Net securities gains (losses)
—

 
—

 
580

 
531

 
29

 
260

 
(1
)
 
534

Non-interest expense
95,844

 
91,920

 
94,216

 
90,493

 
83,020

 
85,175

 
81,897

 
83,145

Income before income taxes
92,901

 
75,513

 
79,362

 
76,225

 
83,388

 
72,626

 
73,668

 
66,718

Income tax provision
33,353

 
26,621

 
28,997

 
26,673

 
31,251

 
27,358

 
27,246

 
25,234

Net income
$
59,548

 
$
48,892

 
$
50,365

 
$
49,552

 
$
52,137

 
$
45,268

 
$
46,422

 
$
41,484

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.75

 
$
0.61

 
$
0.63

 
$
0.63

 
$
0.66

 
$
0.58

 
$
0.59

 
$
0.53

Diluted earnings per share
$
0.73

 
$
0.60

 
$
0.62

 
$
0.62

 
$
0.65

 
$
0.57

 
$
0.58

 
$
0.52

Return on average common equity
12.40
%
 
10.40
%
 
11.20
%
 
11.40
%
 
12.29
%
 
11.05
%
 
11.85
%
 
11.05
%
Return on average assets
1.21
%
 
1.04
%
 
1.14
%
 
1.15
%
 
1.21
%
 
1.09
%
 
1.15
%
 
1.07
%
Net interest margin – tax-equivalent
3.23
%
 
3.18
%
 
3.28
%
 
3.30
%
 
3.25
%
 
3.23
%
 
3.17
%
 
3.21
%
(1) 
All ratios are presented on an annualized basis.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. 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 December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report On Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

154


Management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2016 was effective based on the specified criteria.

Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. That report, which expresses an unqualified opinion on the Company’s internal control over financial reporting as of December 31, 2016, is included in this Item under the heading “Attestation Report of Independent Registered Public Accounting Firm.”


155

Attestation Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of PrivateBancorp, Inc.

We have audited PrivateBancorp, Inc.’s (the Company) internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of the Company as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2016, of the Company and our report dated February 28, 2017 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Chicago, Illinois
February 28, 2017

ITEM 9B. OTHER INFORMATION

None.

PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Certain information regarding our executive officers is included under “Executive Officers” in Item 1 of this Form 10-K and the information included therein is incorporated herein by reference.


156

All other information required to be disclosed pursuant to this item shall be included in an amendment to this report filed with the SEC on Form 10-K/A not later than 120 days after December 31, 2016 or incorporated by reference from our definitive proxy statement for the election of directors, to the extent required, not later than 120 days after December 31, 2016.
 
We have adopted a Code of Ethics as required by the NASDAQ listing standards and the rules of the SEC. The Code of Ethics applies to all of our directors, officers, including our Chief Executive Officer, Chief Financial Officer, and Controller and employees. The Code of Ethics is publicly available on our website at http://investor.theprivatebank.com or at www.theprivatebank.com. If we make substantive amendments to the Code of Ethics or grant any waiver, including any implicit waiver, that applies to any of our directors or executive officers, we will disclose the date and nature of such amendment or waiver on our website or in a report on Form 8-K in accordance with applicable NASDAQ and SEC rules.

ITEM 11. EXECUTIVE COMPENSATION

The information required to be disclosed pursuant to this item shall be included in an amendment to this report filed with the SEC on Form 10-K/A not later than 120 days after December 31, 2016 or incorporated by reference from our definitive proxy statement for the election of directors, to the extent required, not later than 120 days after December 31, 2016.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding security ownership of certain beneficial owners and management required to be disclosed pursuant to this item shall be included in an amendment to this report filed with the SEC on Form 10-K/A not later than 120 days after December 31, 2016 or incorporated by reference from our definitive proxy statement for the election of directors, to the extent required, not later than 120 days after December 31, 2016.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information, as of December 31, 2016, relating to our equity compensation plans pursuant to which equity awards are authorized for issuance. Refer to Note 15 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K for additional information regarding our equity compensation plans.

 
Equity Compensation Plan Information
Equity Compensation Plan Category
 Number of securities 
 to be issued upon 
 exercise of 
outstanding options,
 warrants, and rights 
 (a) 
 
 Weighted-average 
 exercise price of 
 outstanding options, 
 warrants, and rights 
 (b) (1)
 
Number of securities 
remaining available for
future issuance under
equity compensation plans (excluding securities reflected in column (a))
(c)
Approved by security holders (2)
2,952,014

 
$
22.00

 
1,885,574

Not approved by security holders (3)
883

 
29.17

 
—

Total
2,952,897

 
$
22.00

 
1,885,574

(1) 
Weighted-average exercise price is based solely on securities with an exercise price.
(2) 
Includes all outstanding stock options under the Amended and Restated 2011 Incentive Compensation Plan (“2011 ICP”), the 2007 Long-Term Incentive Compensation Plan (“2007 LTICP”) and the Incentive Compensation Plan, all outstanding restricted stock units and performance share units under the 2011 ICP and 2007 LTICP, and shares underlying deferred stock units credited under the Deferred Compensation Plan, payable on a one-for-one basis in shares of our common stock.
(3) 
Represents all remaining outstanding stock options under the Strategic Long Term Incentive Plan (“SLTIC Plan”). At December 31, 2016, the weighted-average remaining contractual term was less than 1 year. In 2007, our Board of Directors adopted the SLTIC Plan which provided for the granting of inducement equity awards to newly recruited officers and employees recruited to join the Company as part of our transformational business plan at that time. The SLTIC Plan was not submitted to stockholders for their approval, and since December 31, 2009, no further awards can be issued under this plan.
 

157

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE

The information required to be disclosed pursuant to this item shall be included in an amendment to this report filed with the SEC on Form 10-K/A not later than 120 days after December 31, 2016 or incorporated by reference from our definitive proxy statement for the election of directors, to the extent required, not later than 120 days after December 31, 2016.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required to be disclosed pursuant to this item shall be included in an amendment to this report filed with the SEC on Form 10-K/A not later than 120 days after December 31, 2016 or incorporated by reference from our definitive proxy statement for the election of directors, to the extent required, not later than 120 days after December 31, 2016.

PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a) (1)
 
Financial Statements
 
 
 
 
 
The following consolidated financial statements of the Registrant and its subsidiaries are filed as a part of this document under “Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.”
 
 
 
 
 
Report of Independent Registered Public Accounting Firm.
 
 
 
 
 
Consolidated Statements of Financial Condition as of December 31, 2016 and 2015.
 
 
 
 
 
Consolidated Statements of Income for the years ended December 31, 2016, 2015, and 2014.
 
 
 
 
 
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015, and 2014.
 
 
 
 
 
Consolidated Statements of Changes in Equity for the years ended December 31, 2016, 2015, and 2014.
 
 
 
 
 
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015, and 2014.
 
 
 
 
 
Notes to Consolidated Financial Statements.
 
 
 
(a) (2)
 
Financial Statement Schedules
 
 
 
 
 
All financial statement schedules for the Registrant and its subsidiaries required by Item 8 and Item 15 of this Form 10-K are omitted because of the absence of conditions under which they are required, or because the information is set forth in the consolidated financial statements or the notes thereto.
 
 
 
(a) (3)
 
Exhibits
 
 
 
 
 
See Exhibit Index filed at the end of this report, which is incorporated herein by reference.


158

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PRIVATEBANCORP, INC.
Registrant

 
By:
 
/s/ Larry D. Richman
 
 
 
 
Larry D. Richman
 
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
Date:
 
February 28, 2017
 

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Larry D. Richman, Jennifer R. Evans and Kevin M. Killips, and each of them, the true and lawful attorney-in-fact and agents of the undersigned, with full power of substitution and resubstitution, for and in the name, place and stead of the undersigned, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully as to all intents and purposes as each of the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 28, 2017.

 
Signatures
 
        Title
 
 
 
 
 
/s/ Larry D. Richman
 
President, Chief Executive Officer and Director
 
Larry D. Richman
 
 
 
 
 
 
 
/s/ Kevin M. Killips
 
Chief Financial Officer and Principal Financial Officer
 
Kevin M. Killips
 
 
 
 
 
 
 
/s/ Paul E. Carey
 
Controller, Chief Accounting Officer and Principal Accounting Officer
 
Paul E. Carey
 
 
 
 
 
 
 
/s/ James M. Guyette
 
Chairman and Director
 
James M. Guyette
 
 
 
 
 
 
 
/s/ Diane M. Aigotti
 
Director
 
Diane M. Aigotti
 
 
 
 
 
 
 
/s/ Norman R. Bobins
 
Director
 
Norman R. Bobins
 
 
 
 
 
 
 
 
 
 

159

 
Signatures
 
        Title
 
 
 
 
 
/s/ Michelle L. Collins
 
Director
 
Michelle L. Collins
 
 
 
 
 
 
 
/s/ Cheryl Mayberry McKissack
 
Director
 
Cheryl Mayberry McKissack
 
 
 
 
 
 
 
/s/ James B. Nicholson
 
Director
 
James B. Nicholson
 
 
 
 
 
 
 
/s/ Richard S. Price
 
Director
 
Richard S. Price
 
 
 
 
 
 
 
/s/ Edward W. Rabin, Jr.
 
Director
 
Edward W. Rabin, Jr.
 
 
 
 
 
 
 
/s/ William R. Rybak
 
Director
 
William R. Rybak
 
 
 
 
 
 
 
/s/ Alejandro Silva
 
Director
 
Alejandro Silva
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


160

EXHIBIT INDEX
 
Exhibit
Number
Description of Documents
2.1
Agreement and Plan of Merger, dated as of June 29,2016, by and among Canadian Imperial Bank of Commerce, PrivateBancorp, Inc. and CIBC Holdco Inc. is incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K (File Np. 001-34066) filed on July 7, 2016.
 
 
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 long-term debt 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 SEC upon request.
 
 
10.1
PrivateBancorp, Inc. Incentive Compensation Plan, as amended, is incorporated herein by reference to Appendix A to the Proxy Statement for its 2005 Annual Meeting of Stockholders (File No. 000-25887) filed on March 11, 2005.
 
 
10.2
Form of Director Stock Option Agreement pursuant to the PrivateBancorp, Inc. Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.30 to the Annual Report on Form 10-K (File No. 000-25887) filed on March 10, 2005.
 
 
10.3
Form of Non-qualified Stock Option Agreement pursuant to the PrivateBancorp, Inc. Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 000-25887) filed on November 9, 2006.
 
 
10.4
PrivateBancorp, Inc. Strategic Long-Term Incentive Plan is incorporated herein by reference to Exhibit 99.1 to the Form S-8 Registration Statement (File No. 333-147451) filed on November 16, 2007.
 
 
10.5
Form of Non-qualified Inducement Performance Stock Option Agreement pursuant to the PrivateBancorp, Inc. Strategic Long-Term Incentive Compensation Plan is herein incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K (File No. 000-25887) filed on February 29, 2008.
 
 
10.6
Form of Non-qualified Inducement Time-Vested Stock Option Agreement pursuant to the PrivateBancorp, Inc. Strategic Long-Term Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.21 to the Annual Report on Form 10-K (File No. 000-25887) filed on February 29, 2008.
 
 
10.7
PrivateBancorp, Inc. 2007 Long-Term Incentive Compensation Plan is incorporated herein by reference to Exhibit 99.1 to the Form S-8 Registration Statement (File No. 333-151178) filed on May 23, 2008.
 
 
10.8
Form of Non-employee Director Restricted Stock Award Agreement pursuant to the PrivateBancorp, Inc. 2007 Long-Term Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on August 11, 2008.
 
 
10.9
Form of Employee Non-qualified Stock Option Agreement pursuant to the PrivateBancorp, Inc. 2007 Long-Term Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on August 11, 2008.
 
 
10.10
Form of Amendment Agreement dated as of January 28, 2010 by and between PrivateBancorp, Inc. and certain officers including Larry D. Richman, C. Brant Ahrens, Bruce R. Hague and Bruce S. Lubin to amend each such officer’s agreements evidencing an award of performance shares granted under the PrivateBancorp, Inc. Strategic Long-Term Incentive Compensation Plan and/or the PrivateBancorp, Inc. 2007 Long-Term Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.23 to the Annual Report on Form 10-K (File No. 001-34066) filed on March 1, 2010.
 
 
10.11
PrivateBancorp, Inc. 2009 Deferred Compensation Plan is incorporated herein by reference to Exhibit 99.1 to the Form S-8 Registration Statement (File No. 333-174840) filed on June 10, 2011.
 
 
10.12
Form of Amendment Agreement to Stock Option Agreement pursuant to the PrivateBancorp, Inc. 2007 Long-Term Incentive Compensation Plan by and between PrivateBancorp, Inc. and each of Bruce Lubin and Kevin Killips, effective December 29, 2011 is incorporated herein by reference to Exhibit 10.41 to the Annual Report on Form 10-K (File No. 001-34066) filed on February 28, 2012.

161

10.13
PrivateBancorp, Inc. 2011 Amended and Restated Incentive Compensation Plan is incorporated herein by reference to Appendix A to the Proxy Statement for its 2014 Annual Meeting of Stockholders (File No. 001-34066) filed on April 11, 2014.
 
 
10.14
Form of Stock Option Agreement pursuant to the PrivateBancorp, Inc. 2011 Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on August 9, 2011.
 
 
10.15
Form of Executive Officer Stock Option Award Agreement for option awards made beginning in 2013 pursuant to the PrivateBancorp, Inc. 2011 Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on May 9, 2013.
 
 
10.16
Form of Executive Officer Stock Option Award Agreement for option awards made beginning February 2015 pursuant to the PrivateBancorp, Inc. Amended and Restated 2011 Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on May 8, 2015.
 
 
10.17
Form of Performance Share Unit Award Agreement pursuant to the PrivateBancorp, Inc. 2011 Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on May 9, 2013.
 
 
10.18
Form of Performance Stock Unit Award Agreement for Executive Officers pursuant to the PrivateBancorp, Inc. 2011 Incentive Compensation Plan, for PSU awards granted in 2014 is incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on May 6, 2014.
 
 
10.19
Form of Performance Share Unit Award Agreement for Executive Officers’ awards beginning March 2015 pursuant to the PrivateBancorp, Inc. Amended and Restated 2011 Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on May 8, 2015.
 
 
10.20
Form of Restricted Stock Award Agreement pursuant to the PrivateBancorp, Inc. 2011 Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on August 9, 2011.
 
 
10.21
Form of TARP-Compliant Restricted Stock Award Agreement for certain non-CEO TARP-compliant 2012 incentive compensation awards pursuant to the PrivateBancorp, Inc. 2011 Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on May 9, 2013.
 
 
10.22
Form of Executive Officer Restricted Stock Award Agreement for equity awards beginning in 2013 made pursuant to the PrivateBancorp, Inc. 2011 Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.4 to the Quarterly Report in Form 10-Q (File No 001.34066) filed on May 9, 2013.
 
 
10.23
Form of Restricted Stock Unit Award Agreement for the Chief Executive Officer’s long-term incentive award beginning in 2013 made pursuant to the PrivateBancorp, Inc. 2011 Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on May 9, 2013.
 
 
10.24
Form of Restricted Stock Unit Award Agreement for Executive Officers other than the CEO, pursuant to the PrivateBancorp, Inc. 2011 Incentive Compensation Plan, for awards beginning February 2014 is incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on May 6, 2014.
 
 
10.25
Form of Restricted Stock Unit Award Agreement for all Executive Officers’ annual incentive deferral awards beginning February 2015 made pursuant to the PrivateBancorp, Inc. Amended and Restated 2011 Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on May 8, 2015.
 
 
10.26
Form of Restricted Stock Unit Award Agreement for Executive Officers’ (other than the CEO) long-term incentive awards beginning February 2015 made pursuant to the PrivateBancorp, Inc. Amended and Restated 2011 Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on May 8, 2015.
 
 
10.27
Form of Restricted Stock Unit Award Agreement for the Chief Executive Officer’s long-term incentive award beginning February 2015 made pursuant to the PrivateBancorp, Inc. Amended and Restated 2011 Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on May 8, 2015.
 
 
10.28 (a)
Form of Restricted Stock Unit Award Agreement for annual incentive deferral awards granted in February 2017 made pursuant to the PrivateBancorp, Inc. Amended and Restated 2011 Incentive Compensation Plan.
 
 

162

10.29 (a)
Form of Restricted Stock Unit Award Agreement for long-term incentive awards granted in February 2017 made pursuant to the PrivateBancorp, Inc. Amended and Restated 2011 Incentive Compensation Plan.
 
 
10.30
Employment Term Sheet Agreement among Larry D. Richman, PrivateBancorp, Inc. and The PrivateBank and Trust Company dated October 30, 2007 is incorporated herein by reference to Exhibit 10.7 to the Annual Report on Form 10-K (File No. 000-25887) filed on February 29, 2008.
 
 
10.31
Employment Term Sheet Agreement among Karen B. Case, PrivateBancorp, Inc. and The PrivateBank and Trust Company dated October 29, 2007 is incorporated herein by reference to Exhibit 10.8 to the Annual Report on Form 10-K (File No.000-25887) filed on February 29, 2008.
 
 
10.32
Employment Term Sheet Agreement among Bruce R. Hague, PrivateBancorp, Inc. and The PrivateBank and Trust Company dated October 25, 2007 is incorporated herein by reference to Exhibit 10.9 to the Annual Report on Form 10-K (File No. 000-25887) filed on February 29, 2008.
 
 
10.33
Employment Term Sheet Agreement among Bruce S. Lubin, PrivateBancorp, Inc. and The PrivateBank and Trust Company dated October 24, 2007 is incorporated herein by reference to Exhibit 10.11 to the Annual Report on Form 10-K (File No. 000-25887) filed on February 29, 2008.
 
 
10.34
Employment Term Sheet Agreement among Kevin M. Killips, PrivateBancorp, Inc. and The PrivateBank and Trust Company dated February 6, 2009 is incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-25887) filed on February 9, 2009.
 
 
10.35
Amendment to Term Sheet for certain employees, including all executive officers, dated December 28, 2012 is incorporated herein by reference to Exhibit 10.40 to the Annual Report on Form 10-K (File No. 001-34066) filed on February 22, 2013.
 
 
10.36
Form of Indemnification Agreement by and between PrivateBancorp, Inc. and its directors and executive officers is incorporated herein by reference to Exhibit 10.10 to the Form S-1/A Registration Statement (File No. 333-77147) filed on June 15, 1999.
 
 
10.37
Summary of Compensation Arrangement with Norman R. Bobins, adopted July 2011, effective as of January 1, 2011 is incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on November 8, 2011.
 
 
10.38
Employee Leasing Agreement by and between The PrivateBank and Trust Company and Norman Bobins Consulting LLC, entered into October 2011, effective as of January 1, 2011 is incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on November 8, 2011.
 
 
11
Statement re: Computation of Per Share Earnings - The computation of basic and diluted earnings per share is included in Note 14 of the Company’s Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” included in this report on Form 10-K.
 
 
12 (a)
Statement re: Computation of Ratio of Earnings to Fixed Charges.
 
 
21 (a)
Subsidiaries of the Registrant.
 
 
23 (a)
Consent of Independent Registered Public Accounting Firm.
 
 
24
Power of Attorney (set forth on signature page).
 
 
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.
 
 
101 (a)
The following financial statements from the PrivateBancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2016, filed on February 28, 2017, 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) the 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.

Exhibits 10.1 through 10.38 are management contracts or compensatory plans or arrangements.

163