10-K 1 pvtb1231201410k.htm 10-K PVTB 12.31.2014 10K
 
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, 2014
or
[ ]
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number 001-34066
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. [X].
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, 2014, determined using a per share closing price on that date of $29.06, as quoted on The Nasdaq Stock Market, was $2,154,565,430.
As of February 27, 2015, there were 78,509,422 shares of the issuer’s voting common stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its 2015 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
 


FORM 10-K
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

PART I

ITEM 1. BUSINESS

PrivateBancorp, Inc.

PrivateBancorp, Inc. ("PrivateBancorp," we or the "Company"), was incorporated in Delaware in 1989 and is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The PrivateBank and Trust Company (the "Bank" or the "PrivateBank"), our bank subsidiary, was opened in Chicago in 1991. We provide customized financial services to middle market companies, as well as business owners, executives, entrepreneurs and families in all the markets and communities we serve.

The last seven years have been transformative for our Company. In late 2007, we hired a group of senior commercial middle market banking executives from a large Chicago-based financial institution and have since built a team of experienced banking professionals to serve our clients and position us well for the future. We are predominantly a commercial middle market bank, with community banking and private wealth capabilities to meet our clients’ comprehensive needs and to serve our markets.

As we have grown, we have expanded into multiple geographic markets. Today, we have 34 offices located in ten states, primarily in the Midwest, with a majority of our business conducted in the greater Chicago market. We employed 1,168 full-time employees at December 31, 2014.

Business Focus

Our vision for the Company is to be the bank of choice in the Midwest for middle market companies. Our goal is to develop meaningful long-term client relationships by delivering high-quality and specialized products and services across our entire platform. Our seasoned banking team, some with more than 30 years of banking experience, serves our clients through a high-touch, relationship-based approach to deliver customized solutions to meet our clients’ needs.

Our growth strategy is primarily focused on organic growth across our lines of business. We continue to focus on developing new areas of specialization as part of our growth plans, selectively adding key personnel with relevant industry experience. We may also consider selective acquisitions from time to time, which may include retail deposit franchises, to diversify our overall funding base, as we seek to increase stable core deposits, to gain market share, and/or augment our product offerings.

Commercial Banking

Our commercial banking group focuses on the specific needs of middle market companies primarily based in the Midwest. We serve a broad range of industries through our commercial banking teams, such as manufacturing, transportation and wholesale distribution, as well as our specialized banking groups, which include healthcare, architecture, engineering and construction, asset-based lending, and security industry financing. Consistent with our relationship banking strategy, we focus on selling multiple products and services to our commercial clients.

Illinois and National Commercial Banking. The Illinois commercial banking group targets primarily Illinois-based middle market commercial clients with approximately $10 million to $2 billion in annual revenue, although the majority of our clients generate $20 million to $500 million in revenue annually. During 2014, commercial and industrial loans increased $832.4 million, of which approximately $640 million related to the Illinois commercial banking group.

The Illinois commercial banking group includes our specialty banking groups focused on specific industry groups in healthcare, asset-based lending, construction and engineering, security industry finance, insurance and financial institutions and technology. Our specialty banking groups employ relationship managers with relevant industry experience and specialized knowledge, providing tailored banking solutions to fit the unique needs of these clients. While our specialty groups market primarily to Illinois-based companies, many of these businesses are national in scope. Healthcare is the largest groups within our commercial lending business, and we have a specialized niche in the assisted living, skilled nursing, and residential care group of this industry. Lending relationships to these providers tend to be larger extensions of credit and are primarily to for-profit businesses. Some of our specialty business groups, such as construction and engineering and financial institutions, tend to serve smaller borrowers and provide an attractive source of funding for us. We have pursued new opportunities to add specialized industry knowledge among our client relationship managers, with the addition of a team in 2013 focused on financial institutions, and a team in 2014 focused on the technology industry.


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The national commercial banking group consists of commercial banking sales teams in markets outside of Illinois, including in those markets where we maintain a banking office or business development office. Having offices outside of our core Illinois presence helps us build our brand, diversify our geographical exposure, and strengthen client relationships. This group serves clients with approximately $10 million to $2 billion in annual revenue.

Commercial Real Estate. Our commercial real estate business focuses on the needs of commercial real estate professionals, including professional commercial and multi-family real estate developers and investors. The majority of our clients are based within our geographic footprint, although properties financed may be located in other regions. We provide funding for construction, acquisition, redevelopment, working capital, and refinancing of retail, industrial, office and multifamily properties and student housing. Our commercial real estate specialists are located in the Chicago, Denver, Detroit, Milwaukee, Minneapolis and St. Louis markets.

Treasury Management. We provide comprehensive services for our commercial clients to help them manage their cash and liquidity, including receivables and payables services, reporting, reconciliation and data integration solutions and demand deposit account and/or investment options for optimizing cash balances. During 2014, we earned treasury management fees of $27.5 million, increasing 11% from 2013. As of December 31, 2014, 74% of our commercial clients had a treasury management relationship with us.

Our clients receive a credit against treasury management fees based on an earned credit rate we apply to their noninterest-bearing deposit balances. We may change that rate from time to time and this, as well as interest rate changes, could impact the balances our clients maintain in noninterest-bearing accounts as well as the amount of the earnings credit they receive. Either of these factors could cause the amount of treasury management fees to vary.

Capital Markets. We assist clients with their risk management objectives by providing interest rate and foreign exchange services. With respect to interest rate hedging, we offer clients interest rate swaps, caps, floors and collars, interest rate swaptions and cancellable interest rate swaps. To assist clients with their currency management, we offer foreign currency wire transfers and facilitate collection of foreign currency drafts and checks, and to address currency fluctuations, we offer clients foreign exchange forwards, window forwards, swaps and options. Prior to the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), these products were traded over-the-counter in a largely unregulated derivatives market. The Dodd-Frank Act significantly reformed the regulatory structure of this market and much of our capitals market business is now subject to regulatory requirements relating to mandatory clearing, trade execution, disclosure, client eligibility and reporting. See "Supervision and Regulation" for more information about Dodd-Frank Act changes.

During 2014, we earned capital market fees (including credit valuation adjustments) of $18.0 million, representing a decline of 13% over the prior year. Our capital markets transaction volume is driven by client demand, which is influenced by their outlook on changes in interest rates.

Syndications. Our syndications team helps us generate fee revenue and strategically manage our loan portfolio. In larger transactions, we may arrange loans on a best efforts basis (in which we commit to extend only a portion of the total credit commitment, pro-rata with other banks, and the borrower obtains the full credit request only if the syndications team arranges sufficient commitments from other banks) or we may fully underwrite credit facilities (in which we commit to lend the full credit facility to the client but then following the initial closing, syndicate portions of that credit to other banks). In this way, syndications allow us to reduce credit exposure to certain client relationships and/or decrease loan concentrations by industry, type or size. We earn various fees from syndicated transactions, including loan origination fees and fees for arranging and administering the syndication transaction.

Total syndication fee revenue was $19.5 million in 2014, compared to $13.4 million in 2013. Syndication fees can fluctuate from quarter to quarter depending on market conditions, loan origination activity and portfolio management decisions. During 2014, we participated in 77 syndicated loan transactions (23 of which we led or co-led), totaling $3.5 billion in commitments, of which we retained $1.3 billion in commitments. During 2014, our syndication fee revenue came primarily from loans originated in our Illinois commercial banking group (49%), commercial real estate group (28%) and national commercial banking group (23%).

Community Banking

Our Community Banking group serves the personal, mortgage and small business banking needs in the markets where we have banking office locations. Community banking typically targets individual clients with up to $250,000 in investable assets, borrowers who need up to $3.5 million in credit, and/or businesses with revenue of up to $10 million annually.


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Retail Banking. Through a network of 24 banking office locations, primarily in the greater Chicago market, community banking provides personal and business banking and investment products and services including checking, savings, money market, certificates of deposit ("CDs"), residential home mortgages, home equity loans and lines of credit. We also offer deposit products through The Palladian PrivateBank, our online banking portal.

In 2014, we opened a de novo banking office in Lincolnwood, Illinois, taking advantage of an opportunity to expand our banking office network in the greater Chicago area in an effort to increase retail deposits.

Residential Mortgage Banking. We offer a full range of residential mortgage loans for purchasing or refinancing 1-4 family residential properties, and have sales teams in the Chicago, St. Louis, Milwaukee, and Detroit markets. We generally use a correspondent model in which we originate loans and then sell the majority of these loans in the secondary market based on the underwriting standards of investors who then service them. We make certain representations and warranties to the purchasers of the loans upon sale, many centering on the quality of our review of borrower information and underwriting processes. If we are found to have breached these representations (for example, if we did not correctly adhere to compliance requirements or the purchaser's underwriting standards), we could be required to repurchase the outstanding amount of the applicable loan. To mitigate this risk, we focus significant attention on the thoroughness of the origination processes. The losses arising from these limited recourse obligations in 2014, 2013 and 2012 were not material. We originate and retain some mortgages in our portfolio, primarily jumbo or nonconforming loans or a small number of loans which our investors ultimately decide not to purchase. We do not service loans for other entities at this time. At December 31, 2014, we employed 39 residential mortgage loan originators. We originated and sold approximately $359.6 million of first mortgage loans during 2014, compared to $514.7 million in 2013. In addition, we employ seven mortgage originators who specialize in reverse mortgages and we broker reverse mortgages for sale to third parties.

The Consumer Financial Protection Bureau (the "CFPB"), which was created under the Dodd-Frank Act and has broad rule-making authority for a wide range of consumer protection laws, promulgated certain rules imposing new requirements on mortgage origination, mortgage servicing, mortgage originator compensation, appraisals and disclosures which went into effect in January 2014. These new rules have significantly impacted the mortgage industry, increased the cost of doing business, and limited the types of mortgage products we offer. In general, the mortgages we originate and sell to investors qualify for the regulatory safe harbor under the ability to repay rules, although we do offer mortgages under certain underwriting criteria to borrowers who the Bank has determined have the ability to repay those loans, but whose loans do not satisfy the safe harbor requirements. See "Supervision and Regulation" for additional information about the implications of the Dodd-Frank Act changes.

Small Business Banking. Small business banking responds to the banking needs of small businesses, as well as their owners and executives, while targeting business clients with revenue of up to approximately $10 million annually. This group operates primarily through a Chicago-based team and offers loans and treasury management services and products similar to those of our commercial banking group, but on a smaller scale. We may consider further expansion in other regions. Our strategy for small-business banking includes using our network of banking office locations and our team of business bankers to attract new small-business clients in order to grow our loan portfolio and funding base and serve the communities where we operate. This client acquisition strategy includes targeted sales programs, marketing campaigns, community involvement and client referrals. Where small business owners have significant personal assets, we seek opportunities to refer them to our private wealth group and its dedicated team of private bankers. Over the past several years, we have hired an experienced leader and increased the number of business bankers dedicated to small-business banking.

We continue to develop our community banking platform as part of our goal to attract core deposits, one of our primary funding sources to support our commercial lending. As of December 31, 2014, deposits from community banking clients comprised 15% of our total deposits compared to 14% as of December 31, 2013.

Private Wealth

Our private wealth business serves two main client segments, high net-worth clients (those with more than $1 million in investable assets) and corporate/institutional clients which are for-profit and not-for-profit companies and organizations. For individuals, we offer private banking, asset investment management, and financial planning and trust services. For corporate/institutional clients, we offer investment management, retirement plan services (401k), custody and escrow transactions.

We offer our private wealth services mostly in the Chicago market and from our banking offices in St. Louis, Milwaukee and Detroit, where we have full service private wealth teams. We focus on cross selling private wealth services to executives and business owners who have a commercial banking relationship with us. As of December 31, 2014, 22% of our commercial clients have a private wealth relationship with us.


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Private Banking. Our private banking services deliver a full range of banking solutions including deposits, loans, and lines of credit for personal and business purposes including residential secured loans, lines secured by marketable securities, and other secured and unsecured lines of credit.

Asset Management. We act as fiduciary and investment manager for individual and corporate clients, which includes creating asset allocation strategies tailored to each client's unique situation while using third-party investment managers to execute these strategies. For managed assets, we offer financial advice and act either in a trustee or agency capacity. Custody and escrow services involve administering and safeguarding assets but do not involve providing financial advice, and those assets are considered non-managed. Under regulatory requirements, certain companies are required to use a "qualified custodian," such as the Bank, for the administration and custody of their clients' assets. Fees earned on "qualified custodian" and escrow assets are typically a flat fee structure and are significantly lower than fees recognized on standard escrow, custody and managed assets, which generally command a higher fee based on the market value of the assets on the last day of the prior quarter or month and are therefore subject to volatility. Total assets under management and administration ("AUMA") increased from $5.7 billion at December 31, 2013 to $6.6 billion at the end of 2014. Approximately 90% of our asset management fee revenue for 2014 related to managed assets.

Lending Activities

We provide a range of commercial, real estate and personal lending products and services to our clients. While the majority of our client relationships are Midwest-based, many of our clients do business outside the Midwest.

We have adopted comprehensive credit policies that include credit underwriting standards customized for the types of loans we make. The goal of our lending program is to meet the credit needs of our diverse client base while using sound credit principles to protect our asset quality. We strive to provide a reliable source of credit, a variety of lending alternatives, and sound financial advice to our clients. When extending credit, our decisions are based upon our evaluation of the client's ability to repay the loan, as well as the value of any collateral securing the loan. Our assessment of the quality and integrity of the borrower are also key considerations in the loan approval process. Our bankers monitor loan performance and maintain regular contact with our clients. Our credit risk management team manages and monitors the loan portfolio, including performing, nonperforming, and stressed credits, and provides workout and nonperforming asset disposition-related activities. Concentrations by industry, collateral type or size are also monitored as part of our credit risk management process.

In conjunction with our commercial middle market focus, our lending activities sometimes involve larger credit relationships. Depending on collateral values, success of a workout strategy or the ability of a borrower to return to performing status, the unexpected occurrence of an event or development adversely impacting one or more of our large clients could materially affect our results of operation and financial condition.

Client Relationships with Commitments > $25 Million
(Dollars in thousands)
 
 
December 31,
 
 
2014
 
2013
Commitments > $25 million
 
 
 
 
Number of client relationships > $25 million
 
136

 
104

Percentage that are commercial and industrial businesses
 
88
%
 
85
%
Total commitments > $25 million
 
$
4,339,470

 
$
3,317,152

Funded loan balances
 
$
2,301,805

 
$
1,783,136

Funded loan balances as a percent of total loan portfolio
 
19
%
 
17
%

Of our largest commitments, six unique borrowers with commitments of $50 million or more represented $339.0 million in total commitments at December 31, 2014 with $71.1 million in loans outstanding, compared to five unique borrowers at December 31, 2013 with $302.8 million in total commitments and $15.9 million in loans outstanding. These relationships with commitments of more than $50 million are subject to increased scrutiny in our credit approval process.

In the normal course of our business, we may use syndications to decrease our credit exposure to clients or loan concentrations by industry, type or size. We also participate in loan transactions that involve a number of banks, primarily to maintain and build client relationships with a view to cross-selling products and originating loans for the borrowers in the future. Although we may strive to lead or co-lead the arrangement, we will also participate with other banks when we have a pre-existing relationship with the borrower. Facilities greater than $20 million shared by three or more federally supervised financial institutions are defined as

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Shared National Credits (“SNCs”) and are typically led by larger institutions. Of our $11.9 billion in total loans outstanding at December 31, 2014, we were party to $4.0 billion of loans with other financial institutions. Included in this amount is $2.5 billion in SNC's, and $1.6 billion in held balances that were led or co-led by us. SNC transactions are typically led by larger institutions.

Commercial

At December 31, 2014, commercial loans comprised 66% of our loan portfolio. Average commercial loan balance per borrower was $3.5 million and $3.4 million for the years ended December 31, 2014 and 2013, respectively. Our commercial loan portfolio includes lines of credit to businesses for working capital needs, term loans, and letters of credit. Included in our commercial loan portfolio are certain non-residential owner-occupied commercial real estate loans where the cash flows from the owners' businesses serve as the primary source of loan repayment. We have a diversified commercial loan portfolio and serve clients in a variety of industries, including manufacturing, healthcare, professional services, transportation and wholesale distribution.

Our commercial lines of credit typically are limited to a percentage of the value of the assets securing the line, and are typically priced using a floating-rate formula. In general, lines of credit are reviewed annually and are supported by accounts receivable, inventory and/or equipment. Depending on the risk profile of the borrower, we may require periodic reports of receivables and inventory and equipment listings to verify the quality of the borrowing base prior to advancing funds. Our term loans are typically secured by the assets of our clients' businesses and have maturities between one to five years, with either floating or fixed-rates of interest. We issue standby or performance letters of credit, and are able to service the international needs of our clients through correspondent banks. We use the same underwriting standards for letters of credit and other unfunded commitments that we use for funded loans.

Commercial loans contain risks unique to the business and market of each borrower. In order to mitigate these risks, we seek to gain an understanding of the business and industry of each borrower; require appropriate reporting, financial, and/or operating covenants; and regularly evaluate our collateral position. Our commercial lending underwriting process includes an evaluation of the borrower's financial statements and projections with an emphasis on operating results, cash flow, liquidity and underwriting ratios, as well as the collateral value, to determine the level of creditworthiness of the borrower. These loans may be secured by a first priority security interest in the assets of the borrower and may require the support of a personal guarantee of one or more of the principals of the borrower. From a risk management standpoint, whether the commercial loans are originated within commercial banking or small-business banking, substantially the same credit policies are applied.

Commercial Real Estate

At December 31, 2014, commercial real estate loans comprised 25% of our loan portfolio. Average loan balance per borrower was $4.0 million and $3.3 million for the years ended December 31, 2014 and 2013, respectively. Our commercial real estate portfolio is comprised of loans secured by various types of collateral including 1-4 family non-owner occupied housing units located primarily in our target market areas, multi-family real estate, office buildings, warehouses, retail space, mixed use buildings, and vacant land, the bulk of which is held for long-term investment or development. Commercial real estate loans are typically floating-rate, with a term of one to five years, and are usually refinanced with permanent financing from other lenders.

Risks inherent in real estate lending are related to the market value of the property taken as collateral, the underlying cash flows and documentation and the general economic condition of the market in which the collateral is located. To mitigate these risks, we obtain and review appraisals of the property and we assess the ability of the cash flow generated from the collateral property to service debt, the significance of any outside income of the borrower or income from other properties owned by the borrower, and the strength of guarantors, as applicable.

Our commercial real estate loan portfolio includes loans with large principal amounts and the repayment of these loans is generally dependent on the successful leasing or sale of the property, the successful operation of the business occupying the property, and the availability of permanent financing. The repayment of these loans is particularly influenced by general conditions in the real estate markets or in the local economy where the property is located. Many commercial real estate loans do not fully amortize the balance over the loan period, but have balloon payments due at maturity. The borrower's ability to make a balloon payment may depend on their ability to either refinance the loan or complete a timely sale of the underlying property. On a non-owner occupied commercial property, if the cash flow from a borrower's project is reduced due to leases not being obtained or renewed, that borrower's ability to repay the loan may be impaired.

Construction

At December 31, 2014, construction loans comprised 3% of our loan portfolio. Average loan balance per borrower was $3.3 million and $3.4 million for the years ended December 31, 2014 and 2013, respectively. Our construction loan portfolio consists of single-

7

family residential properties, multi-family properties, and commercial projects, and includes both investment properties and properties that will be owner-occupied.

As a product group, we believe construction loans have the highest inherent risk. We closely monitor the status of each construction loan throughout its term to mitigate these risks. We also seek to manage these risks by, among other things, ensuring that the collateral value of the property throughout the construction process does not fall below acceptable levels, ensuring that funds disbursed are within parameters set by the original construction budget, and properly documenting each construction draw. Typically, we require full investment of the borrower's equity in construction projects prior to injecting our funds. Generally, we do not allow borrowers to recoup their equity from the sale proceeds of a finished product, if applicable, until we have recovered our funds on the overall project.

Residential, Home Equity, and Personal

At December 31, 2014, residential, home equity, and personal loans comprised 6% of our loan portfolio. Average loan balance per borrower was $173,000 and $281,000 for the years ended December 31, 2014 and 2013, respectively.

Residential Mortgage. Residential mortgage loans are secured by 1-4 family residential properties generally located in the same markets as our mortgage sales centers; however, we do occasionally lend outside these areas. We sell the majority of the residential mortgage loans we originate into the secondary market.

Other Consumer Loans. The majority of our other consumer loan portfolio is comprised of home equity loans and lines of credit, and, to a lesser extent, car loans (mostly for used cars) and secured and unsecured consumer loans, often used to fund educational costs or to consolidate debt. Home equity loans and lines of credit are generally secured by second mortgages on 1-4 family residential properties. We do not sell the home equity loans or lines of credit to investors. Other consumer loans include secured and unsecured consumer loans, the majority of which are term loans. Consumer loans generally have shorter terms and lower balances with higher yields as compared to residential real estate loans. Our personal loan portfolio consists largely of loans for investment asset acquisition (which may be secured by marketable or nonmarketable investment securities) and for general liquidity purposes, including lines of credit which may be unsecured. As of December 31, 2014, personal loans comprised 2% of total loans.

For more information regarding the composition of our loan portfolio, see "Loan Portfolio and Credit Quality" of "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and Note 4 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K. For information regarding our unfunded commitments, see Note 19 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.

Deposits

We rely on a relationship-driven approach to generate deposits and we regard deposits as our primary source of funding. Our total deposits increased from $12.0 billion at December 31, 2013 to $13.1 billion at year-end 2014. We have built a suite of deposit and cash management products and services that support our efforts to attract and retain commercial depositors. Commercial deposits are held in various deposit products we offer, including interest-bearing and non-interest bearing demand deposits, time deposits, savings and money market accounts. In addition to corporate deposits, through our community banking and private wealth groups, we offer a variety of personal banking products, including checking, savings and money market accounts and CDs, which serve as an additional source of funding.


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Given the commercial focus of our core business, a majority of our deposit base is comprised of corporate accounts, which are typically larger than retail accounts. Further, we have a relatively small number of commercial depositors that maintain substantial balances with us, resulting in concentrations of large deposits. Of our large deposit relationships shown in the table below, more than half of the deposits are from financial-services related businesses.

Large Deposit Relationships
(Dollars in thousands)
 
December 31,
 
2014
 
2013
Ten largest depositors:
 
 
 
Deposit amounts
$
2,225,641

 
$
2,078,273

Percentage of total deposits
17
%
 
17
%
$75 Million or More:
 
 
 
Deposit amounts
$
3,285,598

 
$
2,614,321

Percentage of total deposits
25
%
 
22
%
Number of deposit relationships
22

 
16

Financial services-related businesses greater than $75 million to total deposits
14
%
 
15
%
$50 Million or More:
 
 
 
Deposit amounts
$
3,870,857

 
$
3,260,544

Percentage of total deposits
30
%
 
27
%
Number of deposit relationships
32

 
27

Financial services-related businesses greater than $50 million to total deposits
15
%
 
17
%

We also maintain access to a number of wholesale funding sources including brokered deposits, which we use as needed to fund asset growth and manage liquidity. Total brokered deposits, as defined for regulatory purposes, were $3.3 billion and $3.0 billion at December 31, 2014 and 2013, respectively and represented 25% of total deposits at both December 31, 2014 and 2013.

For information regarding our deposits, see "Funding and Liquidity Management" of "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and Note 9 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 residential mortgage-backed securities and collateralized mortgage obligations backed by U.S. Government-owned agencies or issued by U.S. Government-sponsored enterprises, which totaled 76% of our investment portfolio at December 31, 2014. We also invest in bank-qualified tax-exempt obligations of state and local political subdivisions, which totaled 13% of our investment portfolio at December 31, 2014. We may also invest in U.S. Treasury, U.S. Agency or high grade municipal securities. The investment portfolio is one of the tools used to manage our net asset/liability position in an attempt to mitigate the interest rate risk sensitivity and characteristics of the loan portfolio. For information regarding our investment portfolio, see "Investment Portfolio Management" of "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 to 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 expand or reduce 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 18 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.

Competition

We do business in the highly competitive financial services industry. In each of our geographic markets, we compete for loans, deposits, wealth management and other financial services and products with regional, national, and international commercial

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banks, thrifts, credit unions, investment banks, brokerage firms, money managers, and other providers of financial products and services. The greater Chicago market is particularly competitive as a number of financial services companies are attempting to capitalize on opportunities in the commercial middle market space that have arisen as a result the fragmented nature of the Chicago market and the dislocation of customers as area banks have consolidated. While we face pressure on pricing and loan terms for favorable commercial lending relationships, we seek to remain disciplined on pricing and structure.

Many of the products and services offered in the financial services industry have become commoditized over the past few years and, therefore, competition for clients is very strong. Given the changing nature of the banking industry, we could experience increased competition for deposits from a variety of sources including investment banks and finance companies. For private wealth services, we compete with local, regional and national brokerage firms, wealth consulting firms and investment managers, any of which may be either standalone entities or part of larger financial services institutions. Because our private wealth division does not create or offer its own propriety investment products, we are not incentivized to encourage clients to purchase our products, thereby enhancing the independent nature of our advice. In residential mortgage banking, we compete not only with commercial banks, both large and small, that operate in our locations, but also with mortgage brokers of various sizes. In all areas, we work to distinguish ourselves through consistent delivery of superior levels of service, customized solutions and responsiveness expected by our clients.

Some of our competitors are not subject to the same degree of regulation as that imposed on bank holding companies and federally insured state chartered banks, and may be able to price loans, deposits and other products and services more aggressively. In addition, other competitors, because of their size or retail banking office networks, may have greater access to lower cost capital and/or deposits and therefore may be able to compete more effectively on loan pricing or terms.

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.

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

Segments

For information regarding our business segments, which include Banking, (commercial banking, community banking and the private banking business within private wealth), Asset Management 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.

SUPERVISION AND REGULATION

General

Banking is a highly regulated industry. The following is a summary of certain aspects of various statutes and regulations applicable to PrivateBancorp and its subsidiaries. These summaries are not complete, however, and you should refer to the statutes and regulations for more information. 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, if any, could have on our business or revenues. 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. The Bank is an Illinois state-chartered bank and as such, is subject to supervision and examination by the Illinois Department of Financial and Professional Regulation. As a FRB non-member bank, the Bank's primary federal regulator is the FDIC.


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Recent Developments

Capital Requirements - Changes to Implement Basel III Capital Rules Effective for 2015

Historical Regulatory Capital Requirements in Effect as of December 31, 2014. PrivateBancorp is subject to the regulatory capital requirements administered by the FRB, and, for the Bank, the FDIC. The federal regulatory authorities’ risk-based capital guidelines in effect as of December 31, 2014 were based upon the 1988 capital accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. The requirements were intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the requirements, banking organizations were required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations were assigned to various risk categories. A depository institution’s or holding company’s capital, in turn, was classified in one of two tiers, depending on type:

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Core Capital (Tier 1). Tier 1 capital included common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, minority interests in equity accounts of consolidated subsidiaries (and, under existing standards, a limited amount of qualifying trust preferred securities and qualifying cumulative perpetual preferred stock at the holding company level), less goodwill, most intangible assets and certain other assets; or
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Supplementary Capital (Tier 2). Tier 2 capital included, among other things, perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for loan and lease losses, subject to limitations.

PrivateBancorp, like other bank holding companies, was required to maintain Tier 1 capital and “total capital” (the sum of Tier 1 and Tier 2 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including various off-balance-sheet items, such as letters of credit). The Bank, like other depository institutions, was required to maintain similar capital levels under capital adequacy guidelines. In addition, for a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its Tier 1 and total capital ratios had to be at least 6.0% and 10.0% on a risk-adjusted basis, respectively.

Bank holding companies and banks were also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements necessitated a minimum leverage ratio of 3.0% for bank holding companies and non-member banks that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk. All other bank holding companies and non-member banks were required to maintain a minimum leverage ratio of 4.0%, unless a different minimum was specified by an appropriate regulatory authority. In addition, for a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action purposes, its leverage ratio had to be at least 5.0%.

As of December 31, 2014, under the FRB's current capital guidelines, our total risk-based capital ratio was 12.51%, our Tier 1 risk-based capital ratio was 10.49% and our leverage ratio was 9.96%. See the "Capital - Capital Management - Capital Measurements" section in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Note 17 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K for more information regarding our capital ratios and the minimum regulatory guidelines.

New Basel III Capital Rules Effective January 1, 2015. In July 2013, PrivateBancorp’s primary federal regulator, the FRB, along with the Bank’s primary federal regulator, the FDIC, published the Basel III Capital Rules establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including PrivateBancorp and the Bank, compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach, which was derived from the Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 “Basel II” capital accords. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank

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Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel III Capital Rules became effective for PrivateBancorp and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions).

The Basel III Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments as compared to existing regulations.

When fully phased in on January 1, 2019, the Basel III Capital Rules will require PrivateBancorp and the Bank to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average quarterly assets (as compared to a current minimum leverage ratio of 3% for banking organizations that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk).

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

Under the Basel III Capital Rules, the initial minimum capital ratios that became effective on January 1, 2015 are as follows:

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4.5% CET1 to risk-weighted assets;
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6.0% Tier 1 capital to risk-weighted assets;
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8.0% Total capital to risk-weighted assets; and
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4.0% Tier 1 capital to average quarterly assets.

The Basel III Capital Rules 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 capital standards in effect as of December 31, 2014, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking organizations, including PrivateBancorp and the Bank, plan to make a one-time permanent election to continue to exclude these items. PrivateBancorp and the Bank plan to make 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, as Tier 1 capital of bank holding companies, subject to a phase-out period. Trust preferred securities no longer included in the company’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 $169.8 million in trust preferred securities is grandfathered under the rules unless we pursue balance sheet growth through acquisition.

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a four-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).


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With respect to the Bank, the Basel III Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act. Specifically, under the Basel III Capital Rules, to be deemed to be “well capitalized” for prompt corrective purposes, an institution must meet the following minimum ratios: Total Risk-based Capital Ratio of 10%; Tier 1 Risk-based Capital Ratio of 8%; CET1 Risk-based Capital Ratio of 6.5%; and Tier 1 Leverage Ratio of 5%. For an institution to be deemed to be “adequately capitalized” for prompt corrective action purposes, the institution must meet the following minimum ratios: Total Risk-based Capital Ratio of 8%; Tier 1 Risk-based Capital Ratio of 6%; CET1 Risk-based Capital Ratio of 4.5%; and Tier 1 Leverage Ratio of 4%. Please see the “Prompt Corrective Action” section below for more information.

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. Specific changes to the rules impacting PrivateBancorp’s determination of risk-weighted assets include, among other things:

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Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans;
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Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due;
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Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%);
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Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the risk weight category of the underlying collateral securing the transaction;
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Providing for a 100% risk weight for claims on securities firms; and
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Eliminating the current 50% cap on the risk weight for OTC derivatives.

In addition, the Basel III Capital Rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.

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.

Management believes that, as of December 31, 2014, PrivateBancorp and the Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements had been in effect. Given the effect of the final Basel III capital rules, our December 31, 2014 pro forma capital ratios would have been: Risk-based Capital of 12.17%, Tier 1 Risk-based Capital of 10.22%, Leverage Ratio of 10.03%, and Tier 1 Common Capital ratio of 9.09%.

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 will incent banking entities 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.

In September 2014, the federal bank regulators approved final rules implementing the LCR for certain banking organizations with differing rules based on asset size. Currently, LCR does not apply to PrivateBancorp or the Bank, however, if as a result of these rules, federal banking regulators expect us to maintain higher levels of liquid assets, our earnings would be impacted. The LCR became effective January 1, 2015, and as such, its full impact, including any impact on the market for deposit gathering, is not

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yet known. The federal bank regulators have not yet proposed rules to implement the NSFR or addressed the scope of bank organizations to which it will apply. The Basel Committee's final NSFR document states that the NSFR applies to internationally active banks, as did its final LCR document as to that ratio.

Bank Holding Company Regulation

Source of Strength. Under a longstanding policy of the FRB, a bank holding company is expected to act as a source of financial and managerial strength to its banking subsidiaries and to 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, 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 stress testing.

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, 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, also now 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.


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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 Illinois Department of Financial and Professional Regulation.

Dividends. In the FRB's policy statement on the payment of cash dividends by bank holding companies, the FRB 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.
 
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 2012 and 2013, 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. During 2014, the Bank paid $100.0 million in dividends to the Holding Company.

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 Illinois Department of Financial and Professional Regulation, as a FRB non-member bank, its primary federal regulator, the FDIC and, as a depository institution with more than $10 billion in assets, 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:

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extensions of credit by an insured financial institution to the bank holding company and any non-banking affiliates;
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the purchase by an insured financial institution of assets from affiliates;
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the issuance by an insured financial institution of guarantees, acceptances or letters of credit on behalf of affiliates; and
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investments by an insured financial 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

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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, while continuing to operate a banking business, 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 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 non-interest-earning reserves against its transaction accounts. For net transaction accounts in 2015, the first $14.5 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 $14.5 million and $103.6 million. For transaction accounts totaling over $103.6 million, FRB regulations require reserves of $2.7 million plus 10% of the amount over $103.6 million.

Cross-Guaranty. Under the Federal Deposit Insurance Act ("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.


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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 new capital rules revise the current prompt corrective action requirements. See the "Capital Requirements" section above.

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.

Pursuant to Dodd-Frank, the FDIC approved final rules amending the deposit insurance assessment regulations. The rules implement a provision in the Dodd-Frank Act that broadens the assessment base from one based on domestic deposits to one based on total assets less average tangible equity. In addition to broadening the assessment base, the rules establish a separate risk-based assessment system for "large institutions" with more than $10 billion in assets 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 FDIC intends for the new large bank pricing system to result in higher assessments for banks with high-risk asset concentrations, less stable balance sheet liquidity, or potentially higher loss severity in the event of failure. Brokered deposits will 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.

Pursuant to the 2008 Emergency Economic Stabilization Act and the American Recovery and Reinvestment Act of 2009 (each as described more fully below), the maximum deposit insurance on qualifying accounts was increased from $100,000 to $250,000 until December 31, 2013. The Dodd-Frank Act permanently increased the maximum deposit insurance on qualifying accounts 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 also 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 recently issued a rule setting a designated reserve ratio at 2.0% of insured deposits. These policies may result in increased assessments on certain institutions 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;

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•
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.

As a result of the Dodd-Frank Act, the CFPB now has broad authority to enforce consumer protection laws through rulemaking and supervisory and enforcement actions. Given our size, we are subject to supervision by the CFPB relating to many areas of consumer compliance that were previously examined by the FDIC. See "Dodd-Frank Wall Street Reform and Consumer Protection Act" below.

In part due to the formation of the CFPB, 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 result in damage to our reputation.

Throughout 2014, we have been working to strengthen our fair lending compliance program to satisfy regulatory expectations. While we have consistently supported our communities through community development lending in low and moderate income areas across our markets, and through investments in affordable housing initiatives including affordable home loans, our residential lending volume in certain communities during 2010 through 2012 was lower than expectations. In response, we have created a dedicated community lending team and have invested in expanded marketing and advertising to strengthen our mortgage lending outreach to underserved borrowers and communities across our market areas. As a result of these efforts, we have improved our direct residential mortgage lending activity during 2014 in the targeted markets and we continue to focus on enhancing our community lending efforts and fair lending compliance programs. However, we could be subject to supervisory enforcement action, including potential civil money penalties, in light of past lending activity.

Community Reinvestment. Under the Community Reinvestment Act (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. The Bank was assigned a "satisfactory" rating at its last published exam completed in 2009. Finalization of the Bank's most recent CRA rating from its 2013 exam that evaluated the 2010-2012 period, is still pending conclusion of the regulatory process. Fair lending compliance is taken into consideration in evaluating CRA performance and alleged violations may adversely impact CRA ratings. Less than satisfactory CRA ratings could make it more difficult to obtain regulatory approval of applications and could limit an institution's growth and strategic opportunities.

Real Estate Lending Concentrations. The FDIC, FRB and the Office of the Comptroller of the Currency have issued 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 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.


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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 a 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 and lease portfolio. 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 and results in a range of estimated losses.

Dodd-Frank Wall Street Reform and Consumer Protection Act

In July 2010, President Obama signed into law the Dodd-Frank Act which has already significantly changed the financial regulatory landscape and will continue to affect the operating activities of financial institutions and their holding companies, as well as others. The expected burden of compliance with the Dodd-Frank Act and its implementing rules and regulations (some of which are final while others are pending issuance or not yet proposed) is expected to increase our operating costs and reduce revenues. The Dodd-Frank Act includes provisions that, among other things:

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Direct the federal bank regulatory agencies to review and propose new capital requirements applicable to banking institutions. See "Recent Developments - Capital Requirements" above.
•
Require regulatory agencies to make capital requirements for bank holding companies countercyclical, so that capital requirements increase in times of economic expansion and decrease in times of economic contraction.
•
Require financial institutions with more than $10 billion in assets, such as the Bank, to conduct annual capital adequacy stress tests. In October 2012, the FDIC, FRB and OCC issued a final rule requiring state nonmember banks and savings associations with total consolidated assets of more than $10 billion to conduct annual stress tests based on three different scenarios: baseline, adverse and severely adverse scenarios. The final rule requires the Bank to calculate, based on specific scenarios provided to the covered institution by the FDIC, the impact on potential losses, pre-provision revenues, loan loss reserves, and pro forma capital positions, including the impact on capital levels and ratios, during the specified time period. The Bank commenced the required stress testing in October 2013, and submitted the results to the FDIC in March 2014. The Bank intends to submit its stress testing based on September 30, 2014 data to the FDIC during the first quarter of 2015 and thereafter, as required under the rules, publicly disclose a summary of such results.
•
Increase the regulation of derivatives and hedging transactions that were previously conducted over the counter, including interest rate swaps and foreign exchange transactions, including:
•
additional reporting requirements for historical, transitional and post-enactment trades went into effect in 2013.
•
mandatory clearing requirements for certain swaps went into effect in June 2013, which impose increased costs and new collateral requirements for us and, in some cases, clients, although many of the Bank’s clients are eligible to apply for the end user clearing exemption.
•
requirements to execute certain swaps on an exchange or swap execution facility went into effect in February 2014 creating market transparency which could lead to compressed margins.
•
Create the Financial Stability Oversight Council that will recommend to the FRB increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.
•
Under the provisions known as the "Volcker Rule", limit and regulate financial institutions' ability to engage in proprietary trading or to own or invest in hedge funds and private equity funds.
•
Implement corporate governance provisions, including with regard to executive compensation, say on pay votes, proxy access by shareholders and "clawback" policies which apply to all public companies, not just financial institutions.
•
Require financial institutions to retain a specified percentage of certain non-traditional mortgage loans and other assets in the event that they seek to securitize such assets.

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•
Centralize primary responsibility for consumer financial protection with the CFPB, which is responsible for implementing, examining, and enforcing compliance with federal financial consumer protection laws. The 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.
•
In January 2013, the CFPB finalized certain mortgage reform provisions impacting the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) to, among other things:
•
expand the population of loans subject to higher cost loan regulations and additional disclosures.
•
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.
•
impose appraisal requirements for high cost loans and loans secured by first lien residential mortgages.
•
In October 2013, rules regulating electronic transfers of foreign currency originated by consumers became effective, requiring 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.
•
The CFPB finalized rules that propose to simplify and integrate the mortgage disclosures required under TILA and RESPA; those rules are effective August 1, 2015.
•
The CFPB has conducted various studies that may lead to future regulation, including among other things possible consumer protection standards for reverse mortgages.

EXECUTIVE OFFICERS

Our executive officers are elected annually by our Board of Directors. Certain information regarding our executive officers is set forth below.

Name (Age)
Position or Employment for Past Five Years
Executive
Officer Since
Larry D. Richman (62)
President and Chief Executive Officer 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 (44)
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 (56)
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 in 1992, Ms. Case established and managed the Midwest real estate lending operations for New York-based Marine Midland Bank.
2007

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Jennifer R. Evans (56)
Executive Vice President, General Counsel and Corporate Secretary of the Company. 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 (60)
Executive Vice President of the Company and President of National Commercial Banking and Regional Markets 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 (60)
Executive Vice President of the Company and Chief Financial Officer of the Bank since March 2009. Mr. Killips assumed additional leadership responsibility for operational functions in early 2012. Prior to joining the Company, Mr. Killips served as controller and chief accounting officer of Discover Financial Services from March 31, 2008. Prior to joining Discover Financial Services, Mr. Killips was employed by LaSalle Bank 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, 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
Bruce S. Lubin (61)
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 since 1990, when LaSalle acquired The Exchange National Bank of Chicago. Mr. Lubin was an employee of Exchange beginning in 1984.
2007
Kevin J. Van Solkema (54)
Mr. Van Solkema joined the Company in January 2008 and serves as Executive Vice President of the Company and Chief Credit Risk Officer of the Bank. Mr. Van Solkema was previously 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. In April 2004, Mr. Van Solkema was appointed 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 in 2001.
2008
Leonard Wiatr (67)
Mr. Wiatr joined the Company in March 2008 as Chief Compliance and Regulatory Affairs Officer and in May 2010 assumed the responsibility of Executive Vice President of the Company and Chief Risk Officer of the Bank. Mr. Wiatr previously served at ABN AMRO and its subsidiary LaSalle Bank Corp. as Executive Vice President. Previous to that, Mr. Wiatr held the role of Examiner-In-Charge for Large Bank Supervision for the Office of the Comptroller of the Currency. Mr. Wiatr spent 33 years at the Office of the Comptroller of the Currency.
2010
Vicki Znavor (54)
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 from November 2009. Previous to that, Ms. Znavor 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

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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 our 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 viewed 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.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

•
continued uncertainty regarding U.S. and global economic outlook that may impact market conditions or affect demand for certain banking products and services;
•
unanticipated developments in pending or prospective loan transactions or greater-than-expected paydowns or payoffs of existing loans;
•
unanticipated changes in interest rates;
•
competitive pressures in the financial services industry that may affect the pricing of the Company’s loan and deposit products as well as its services;
•
unforeseen credit quality problems or changing economic conditions that could result in charge-offs greater than we have anticipated in our allowance for loan losses or changes in value of our investments;
•
lack of sufficient or cost-effective sources of liquidity or funding as and when needed;
•
loss of key personnel or an inability to recruit and retain appropriate talent;
•
greater-than-anticipated costs to support the growth of our business, including investments in technology, process improvements or other infrastructure enhancements, or to address compliance or regulatory 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 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

22

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 affecting us and our business, 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.

A significant portion of our loan portfolio is comprised of commercial and industrial loans, many of which include larger credit relationships. The repayment of commercial loans is largely dependent upon the financial success and viability of the borrower and the state of the economy.

Our commercial and industrial loan portfolio, which includes owner-occupied commercial real estate, totaled $7.9 billion, or 66% of our total loan portfolio, at December 31, 2014, compared to $7.1 billion, or 67% of our total loan portfolio, at December 31, 2013. The repayment of the loans in our commercial and industrial portfolio is largely dependent upon the financial success and viability of the borrower.

Many of our commercial and industrial loans are secured by different types of collateral related to the underlying business, such as accounts receivable, inventory, equipment, and, in the case of owner-occupied commercial real estate loans, by the real estate property, all or any of which often fluctuate in value, and which may result in the loan being temporarily under-collateralized. If we foreclose on underlying collateral in the event of default of any such loan, we may not be able to recover the full principal amount of the loan as the unique nature of certain collateral may make it difficult and costly to liquidate.

Higher-risk commercial and industrial loans 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. These metrics were defined by the FDIC in late 2012. 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 due to their leveraged position, and typically have lower collateral coverage than similar commercial and industrial loans that are not classified as higher-risk. As a result, in the event of default, the loss potential may be greater for these types of loans versus similar commercial and industrial loans that are not classified as higher-risk.

Many of our commercial and industrial loans involve larger relationships. At December 31, 2014, we had credit commitments of $25 million or more totaling $4.3 billion. Of this total commitment at December 31, 2014, we had $2.3 billion in loans outstanding, or 19% of our loan portfolio, in amounts in excess of $25 million. Some of these borrowers may be related to other obligors as guarantors or share related ownership structures. Approximately 88% of these large credits are commercial and industrial businesses; the remaining exposure relates primarily to commercial real estate loans. Of our largest commitments, commitments of $50 million or more represented $339.0 million in total commitments at December 31, 2014, compared to $302.8 million in total commitments at December 31, 2013. As of December 31, 2014, $71.1 million of these largest commitments was outstanding, compared to $15.9 million at December 31, 2013. These credits, as well as larger credit relationships, are subject to increased scrutiny in our credit approval process. Depending on collateral values, success of a workout strategy or the ability of a borrower to return to performing status, the unexpected occurrence of an event or development adversely impacting one or more of our large clients could materially affect our results of operation and financial condition.

The largest industry segment concentration within our commercial lending business is the healthcare industry. We have a specialized niche in the nursing and residential care segment of the healthcare industry. At December 31, 2014, 23% of the commercial loan portfolio, or $1.8 billion, was composed of loans within the healthcare industry, primarily loans in which the healthcare 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 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. As of December 31, 2014, 61% of the healthcare portfolio was secured by facilities in five states, with Illinois representing the highest percentage of facilities at 18%.


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

We depend on access to a variety of funding sources to provide sufficient liquidity to support our loan growth strategy, and accommodate the transaction and cash management needs of our clients, including client draws on unused lines of credit and other business needs. Our total unfunded commitments to extend credit, including obligations to issue letters of credit, grew to $6.3 billion as of December 31, 2014 from $5.0 billion at December 31, 2013. It is difficult to predict when clients may draw on such commitments and, given the large size of many of our lending relationships, the impact such draws may have on our liquidity needs. If we experience draws on unfunded commitments and other loan growth in amounts significantly greater than our expectations, we may not have sufficient liquidity to fund our balance sheet on a cost-effective basis.
Currently, our primary sources of funding are deposits, the majority from commercial clients and large institutional accounts, and Federal Home Loan Bank ("FHLB") borrowings. Our deposit base is relatively concentrated in large relationships, with our ten largest deposit relationships comprising 17% of total deposits at December 31, 2014. At year end 2014, we had 22 client relationships with greater than $75 million in deposit balances that totaled $3.3 billion, or 25% of total deposits. The unanticipated loss of one or more large relationships, or significant movements in large deposit accounts, could stress our liquidity. If our primary sources of liquidity are insufficient, we may need to rely on contingent funding sources which may not be available on favorable terms or at all, depending on the eligibility of our collateral, market conditions and other factors, and this would have a negative impact on our profitability.
Also, the federal banking agencies have proposed new liquidity standards that could result in our having to lengthen the term of our funding, restructure our business lines by forcing us to seek new sources of liquidity, and/or increase our holdings of liquid assets. As part of the Basel III capital process, the Basel Committee on Banking Supervision has finalized a new liquidity standard, a liquidity coverage ratio (“LCR”), which requires a banking organization to hold sufficient "high quality liquid assets" to maintain adequate liquid assets to meet potential funding needs for a 30 calendar day liquidity stress scenario. Although the proposal will not apply directly to us because we have less than $50 billion in assets, the substance of the proposal may inform the regulators' assessment of our liquidity, and may cause secondary impact in the markets in which we actively participate as well as the competitive environment, including the pricing for deposits, in which we operate. We could be required to reduce our holdings of illiquid assets and increase our level of core deposits, which may adversely affect our operating results and financial condition and could have an adverse effect on our growth.
Our allowance for loan losses may be insufficient to absorb losses in our loan portfolio.

Lending money is a substantial part of our business. 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;
•
changes in economic and industry conditions;
•
the duration of the loan;
•
in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral; and
•
the ability to identify potential repayment issues in loans at an early stage.

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 is not a prediction of our actual credit losses going forward. The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships that are considered to be impaired, as well as probable losses inherent in the loan portfolio that are not specifically identified, which is determined using a methodology that is a function of quantitative and qualitative factors applied to segments of our loan portfolio and management's judgment. In calculating the allowance, we use historical default and loss information and a great deal of judgment, including with respect to the state of the overall economy, the strength of the commercial real estate market, and negative events or circumstances that might impact an individual borrower. Accordingly, there can be no assurance that we will not incur losses on loans greater than what we have provided for in the allowance.

The allowance for loan losses was $152.5 million at December 31, 2014, compared to $143.1 million at December 31, 2013. The allowance for loan losses as a percentage of total loans was 1.28% at December 31, 2014, compared to 1.34% at December 31, 2013. Our allowance as a percentage of total loans reflects a level based on management's analysis of the risk inherent in our loan portfolio. Although we believe our loan loss allowance is adequate to absorb probable and reasonably estimable losses in our loan portfolio as of the balance sheet date, the allowance may not be adequate especially if economic conditions worsen or the factors

24

used to calculate the allowance change. Also, proposed changes in accounting principles related to the calculation/determination of the allowance could result in a required increase.

In the event we are required to increase our allowance for loan losses, our credit losses exceed our allowance or we are required to take higher than anticipated charge-offs in future periods, our earnings and our capital will be adversely affected. Given that approximately 20% of our loan portfolio at December 31, 2014 was comprised of credit relationships in amounts in excess of $25 million, we may experience variability in our quarterly loan loss provision expense and charge-offs if larger or leveraged credits default, which may impact credit quality trends.

We may be adversely affected by interest rate changes or an extended period of continued low interest rates.

Our operating results are largely dependent on our net interest income, which is the difference between the interest income earned on earning assets, usually 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 recent low interest rate environment, and our net interest income may be adversely impacted by an extended period of continued low rates. Interest rates are affected by factors including: monetary policy of the FRB, actual inflation or deflation or expectations regarding the same, actual or forecasted economic growth or contractions, unemployment rates, domestic and foreign events, and instability in domestic and foreign financial markets. The timing of any FRB action to curtail or eliminate various stimulus-related programs, as a result of inflation concerns or otherwise, could have an impact on interest rates in general and our net interest margin in particular. While the yield on our loan portfolio is primarily variable and based on short-term rates and would therefore adjust quickly to a rise in interest rates, the impact on our cost of funds from a rise in interest rates will depend on a number of factors, including but not limited to: the competitive environment in the banking sector for deposit pricing, opportunities for clients to invest in other markets such as fixed income and equity markets, and the propensity of customers to invest in their businesses. The effect on our net interest income from an increase in interest rates will ultimately depend on the extent to which the aggregate impact of loan re-pricings exceeds the impact of increases in our cost of funds. Moreover, depending on the level and trend of the aforementioned factors, our cost of funds could increase more rapidly than foreseen and the level of change in cost of funds may even exceed the increase in yield in our loan portfolios.

Our investment portfolio also contains interest rate sensitive instruments and the market value of these instruments may be adversely affected by changes in interest rates, domestic and international economic and political conditions, issuer or insurer credit deterioration and market factors. A rise in interest rates or spread widening would reduce the net unrealized gains that we had in our investment portfolio at the end of 2014.

We will become subject to more stringent capital requirements, which may adversely impact our return on equity and constrain our growth.

In July 2013, each of the U.S. federal banking agencies adopted final rules implementing the recommendations of the Basel Committee on Banking Supervision to strengthen the regulatory capital requirements of all banking organizations in the United States. The new capital framework, referred to as Basel III, substantially revises the risk-based capital requirements applicable to bank holding companies and depository institutions, including PrivateBancorp and the Bank, compared to current U.S. risk-based rules. The final Basel III rules became effective for the Company and the Bank on January 1, 2015 and will be fully phased-in by January 1, 2019.

Basel III creates a new regulatory capital standard based on Tier 1 common equity and increases the minimum leverage and risk-based capital ratios applicable to all banking organizations. Basel III also changes how a number of the regulatory capital components are calculated. Any significant increase in our capital requirements could reduce our growth and profitability and materially adversely affect our business, financial condition, results of operations and growth prospects. For more information about the regulations to which we are subject, see the section captioned “Supervision and Regulation.”

Our business could be significantly impacted if we, or our third party service providers, suffer failure, cyber-attack or disruptions of information systems or if our employees cause an operational infrastructure breakdown or failure.

We rely heavily on communications, data processing and other information processing systems to conduct our business 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. Although we take ongoing protective monitoring, detection, and prevention measures and perform penetration testing and risk assessments at least annually, our computer systems, software and networks, and those of our third

25

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 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. There can be no assurance that our policies, procedures and protective measures designed to prevent or limit the effect of a failure, interruption or security breach, or the policies, procedures and protective measures of our third party providers, will be effective. 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. In addition, our business is highly dependent on our ability to process, record and monitor, on a continuous basis, a large number of transactions. To do so, we are dependent on our employees and therefore, the potential for operational risk exposure exists throughout our organization, including losses resulting from human error. We could be materially adversely affected if one or more of our employees cause a significant operational breakdown or failure. If we fail to maintain adequate infrastructure, systems, controls and personnel relative to our size and products and services, our ability to effectively operate our business may be impaired and our business could be adversely affected.

The loss of key managing directors 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 managing directors who have primary contact with our clients and have 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 could have a material adverse effect on our business if we are unable to hire suitable replacements or we are unable to successfully retain the client relationships of a departing managing director.

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

Our ability to provide certain products and services could be adversely affected by the actions and commercial soundness 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 counterparty or customer. In such instances, the collateral we hold 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 interest rate and foreign exchange 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 include credit risk of our counterparties, operational risk and settlement risk, which may be most significant in foreign exchange transactions where timing differences between settlement centers can result in us paying our client and/or 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. The risk exposure to our counterparties requires active monitoring as well as liquidity management to ensure timely and cost efficient posting of collateral. Operational risk includes errors in execution of internal bank procedures and controls, which could expose us to financial risk and/or reputation loss. A lapse or breakdown of these procedures or controls could significantly increase our exposure to counterparty credit risk and operational risk, which could result in a material loss to us.

A prolonged period of economic uncertainty or worsening of current 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 economy has been improving recently, the U.S. economy remains susceptible to a sluggish labor market, limited GDP growth, low inflation and housing price volatility, as well as uncertainty related to U.S. and European fiscal issues, political climates and global economic conditions. Economic uncertainty, sustained high unemployment, volatility or disruptions of global financial markets, or prolonged deterioration in the global, national or local business or economic conditions could result in, among other things, a deterioration

26

of credit quality, impairment of real estate values or a reduced demand for credit or other products and services we offer to clients. In addition, the financial condition of the State of Illinois where we do the majority of our business (higher corporate tax rates, significant budget deficits and a deteriorating credit rating) may contribute to an adverse climate for doing business in the state which could negatively impact us to the extent it leads to declines in business activity in Illinois. 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.

An increase in the number of delinquencies, bankruptcies or defaults in future periods by our borrowers due to any of the factors above, or otherwise, could result in a higher level of nonperforming assets, net charge-offs, provision for loan and covered asset losses, and valuation adjustments on any loans held for sale, which would materially adversely affect our financial condition and results of operations.

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

During the last few years, the Federal Reserve has been involved in a series of domestic monetary policy initiatives in response to economic conditions, including the purchase of U.S. treasury securities and mortgage-backed securities commonly known as “quantitative easing” (“QE”). Among other things, quantitative easing strategies were intended to create or maintain a low interest rate environment and to stimulate economic activity, and have theoretically caused interest rates to be lower than they would have been without such involvement. The Federal Reserve has been gradually tapering off the program since mid-2013, and formally ended the program during the fourth quarter of 2014. The impact of the end of QE is a source of ongoing uncertainty because its absence may have an impact on the level and direction of interest rates should the economy encounter headwinds. Interest rate volatility impacts the level and cost of deposits and liquidity levels in the financial system in general and the banking system in particular, which may disrupt financial markets and could adversely impact the level and cost of our deposits, the value of our investment securities portfolio or general economic conditions. In addition, we expect there will continue to be significant competition for deposits which may also impact our cost of deposits. A sharp movement up or down in interest rates could have a significant, adverse impact on our operating results.

We are highly regulated and may be adversely affected by changes in banking laws, regulations, and regulatory practices.

We 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 credit, 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. As described above in “Supervision and Regulation,” the provisions of the Dodd-Frank Act and recently adopted regulations have significantly changed the overall bank regulatory framework with increased capital and liquidity requirements, heightened risk management expectations, and new consumer protection standards. Any failure on our part to comply with laws, regulations, and other regulatory requirements applicable to us or expectations of our regulators relating to compliance or safe and sound banking practices could result in regulatory sanctions, civil money penalties or adverse actions against us, which in turn could increase our compliance burden and costs of doing business, restrict our ability to expand our business or result in damage to our reputation.

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 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.

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

Bank regulatory authorities have substantial supervisory and enforcement authority to address compliance with applicable laws and regulations (including laws and regulations governing consumer credit, fair lending, privacy, information security and anti-

27

money laundering and anti-terrorism laws). The creation of the CFPB under the Dodd-Frank Act has generally led to heightened scrutiny by banking regulators of financial institutions' compliance with consumer lending laws and consumer financial regulations, particularly with respect to "unfair, deceptive or abusive" acts and practices as well as alleged fair lending violations based on claims of disparate treatment or disparate impact on minority groups in connection with consumer lending activities, and the CFPB has imposed significant fines and penalties on certain organizations in this regard. Failure to comply with laws, regulations, or new consumer protection standards applicable to us or the expectations of our regulators relating to compliance practices could result in regulatory sanctions, civil money penalties or adverse actions against us, which in turn could increase our compliance burden and costs of doing business, restrict our ability to expand our business or result in significant damage to our reputation.

While we have consistently supported our communities through community development lending in low and moderate income areas across our assessment areas, through investments in affordable housing initiatives including affordable home loans, through financial contributions to community groups and through significant volunteer service by our employees and management teams, our residential lending volume in certain communities during 2010 through 2012 was lower than expectations. In response, we have created a dedicated community lending team and have invested in expanded marketing and advertising to strengthen our mortgage lending outreach to underserved borrowers and communities across our market areas. As a result of these efforts, we have improved our direct residential mortgage lending activity in the targeted markets and we continue to focus on enhancing our community lending efforts and fair lending compliance programs. We do not anticipate that the costs of our actions to address these issues will be material to our financial results. While we are committed to maintaining effective compliance programs that satisfy regulatory expectations, based on our discussions with our regulators, we understand that they are considering supervisory enforcement action, including potential civil money penalties, in light of past lending activity. Although not material to the execution of our current business plans or organic growth strategy, we would need to resolve these regulatory concerns before pursuing mergers or acquisitions or other expansion that requires prior regulatory approval.

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

We face substantial competition in all phases of our operations from a variety of different competitors. Our future success will depend on our ability to compete effectively in this environment. We compete for commercial business with many banks that are substantially larger than we are and, in some cases, we may have a competitive disadvantage due to their greater resources, broader product offerings and economies of scale. In the recent period of competitive loan demand and persistently low interest rates, 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 to depositors, this pricing pressure has impacted our margins.

Remaining competitive will require ongoing investments in technology and infrastructure to enhance service delivery, support new products and services and continue to grow our business in the current regulatory environment. These investments are directed at adapting existing products and services to evolving technology and the demands of our clients. Falling behind our competitors, who may have more extensive resources to invest, in any of these areas, could adversely affect our business.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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 24 full service banking offices in the greater Chicago, Detroit, Milwaukee, and St. Louis metropolitan areas. We also have business development offices located in Colorado, Connecticut, Georgia, Iowa, Michigan, Minnesota, Missouri and Ohio. With the exception of 11 locations which are owned, all other offices are leased from unaffiliated third parties. At certain Bank locations, excess space is leased to third parties.

We also own 24 automated teller machines ("ATMs") 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 7 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.

ITEM 3. LEGAL PROCEEDINGS

28


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

As of December 31, 2014, there were various other legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. Management does not believe that the outcome of these proceedings will have, individually or in the aggregate, a material adverse effect on the Company’s results of operations, financial condition or cash flows.

ITEM 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 tier of The NASDAQ Stock Market. As of February 27, 2015, there were approximately 483 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 2014 and 2013. As of February 27, 2015, the closing market price of our common stock was $34.73 per share.
 
 
2014
 
2013
 
Fourth
 
Third
 
Second
 
First
 
Fourth
 
Third
 
Second
 
First
Market price of common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High
$
34.17

 
$
31.38

 
$
31.50

 
$
31.66

 
$
29.51

 
$
24.82

 
$
21.41

 
$
19.40

 
Low
$
26.51

 
$
27.76

 
$
25.20

 
$
27.01

 
$
20.87

 
$
20.59

 
$
17.22

 
$
15.73

 
Quarter-end
$
33.40

 
$
29.91

 
$
29.06

 
$
30.51

 
$
28.93

 
$
21.40

 
$
21.22

 
$
18.89

 
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)
0.12
%
 
0.13
%
 
0.14
%
 
0.13
%
 
0.14
%
 
0.19
%
 
0.19
%
 
0.21
%
 
Book value per share at quarter-end
$
18.95

 
$
18.37

 
$
17.90

 
$
17.21

 
$
16.75

 
$
16.40

 
$
15.88

 
$
15.87

(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 the balance sheet. The Board does evaluate dividends on a quarterly basis and may adjust those plans from time to time. A discussion regarding the restrictions applicable to our ability and the ability of our subsidiaries to pay dividends is included in the "Bank Regulation" section of "Supervision and Regulation" in Item 1 and Note 17 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.


30

Stock Performance Graph

The graph below illustrates, over a five-year period, the cumulative total return (defined as stock price appreciation and dividends) to stockholders from an investment in our common stock against a broad-market total return equity index and a published industry total return equity index. The published industry total return equity index used in this comparison is the Center for Research in Security Prices index for NASDAQ Bank Stocks and the broad-market total return equity index used in this comparison is the Russell 2000 Index.


Comparison of Five-Year Cumulative Total Return Among
PrivateBancorp, Inc., the NASDAQ Bank Index, and the Russell 2000 Index (1) 
 
 
December 31,
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
PrivateBancorp
$
100.00

 
$
160.81

 
$
123.24

 
$
172.41

 
$
326.18

 
$
377.08

NASDAQ Bank Index
100.00

 
114.16

 
102.17

 
121.26

 
171.86

 
180.31

Russell 2000 Index
100.00

 
126.86

 
121.56

 
141.43

 
196.34

 
205.95

(1) 
Assumes $100 invested on December 31, 2009 in PrivateBancorp’s common stock, the NASDAQ Bank Index and the Russell 2000 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, 2014, which are solely in connection with the administration of our employee share-based compensation plans. Under the terms of these plans, we accept shares of common stock from plan participants if they elect to surrender previously-owned shares upon exercise of options to cover the exercise price or, in the case of both restricted shares of common stock 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, 2014
501

 
$
29.53

 
—

 
—

November 1 - November 30, 2014
490

 
32.66

 
—

 
—

December 1 - December 31, 2014
500

 
32.23

 
—

 
—

Total
1,491

 
$
31.46

 
—

 
—


Unregistered Sale 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, 2014 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 financial condition and operating results 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)
2014
 
2013
 
2012
 
2011
 
2010
Operating Results
 
 
 
 
 
 
 
 
 
Interest income
$
524,387

 
$
492,238

 
$
487,036

 
$
481,146

 
$
507,925

Interest expense
69,650

 
71,175

 
67,103

 
74,019

 
106,968

Net interest income
454,737

 
421,063

 
419,933

 
407,127

 
400,957

Provision for loan and covered loan losses
12,044

 
31,796

 
71,425

 
132,897

 
194,541

Fee revenue (1)
117,060

 
112,816

 
111,246

 
92,476

 
81,064

Net securities gains (losses)
530

 
1,174

 
(205
)
 
5,771

 
12,182

Non-interest expense
312,076

 
303,314

 
327,132

 
302,277

 
299,598

Income before income taxes
248,207

 
199,943

 
132,417

 
70,200

 
64

Income tax provision (benefit)
95,128

 
76,994

 
54,521

 
25,660

 
(1,737
)
Net income
153,079

 
122,949

 
77,896

 
44,540

 
1,801

Net income attributable to noncontrolling interests
—

 
—

 
—

 
170

 
284

Net income attributable to controlling interests
153,079

 
122,949

 
77,896

 
44,370

 
1,517

Preferred stock dividends and discount accretion
—

 
—

 
13,368

 
13,690

 
13,607

Net income (loss) available to common stockholders
$
153,079

 
$
122,949

 
$
64,528

 
$
30,680

 
$
(12,090
)
Weighted-average common shares outstanding
77,007

 
76,398

 
71,951

 
70,449

 
70,024

Weighted-average diluted common shares outstanding
77,822

 
76,645

 
72,174

 
70,642

 
70,024

Selected Operating Statistics
 
 
 
 
 
 
 
 
 
Net revenue (2)
$
575,560

 
$
538,300

 
$
533,847

 
$
508,231

 
$
497,780

Operating profit (2)
263,484

 
234,986

 
206,715

 
205,954

 
198,182

Provision for loan losses (3)
$
13,169

 
$
31,164

 
$
70,876

 
$
130,555

 
$
192,024

Effective tax rate
38.3
%
 
38.5
%
 
41.2
%
 
36.6
%
 
n/m

Per Share Data
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
1.96

 
$
1.58

 
$
0.88

 
$
0.43

 
$
(0.17
)
Diluted earnings (loss) per share
1.94

 
1.57

 
0.88

 
0.43

 
(0.17
)
Cash dividends declared
0.04

 
0.04

 
0.04

 
0.04

 
0.04

Book value at year end
18.95

 
16.75

 
15.65

 
14.72

 
13.87

Tangible book value at year end (2)(4)
17.67

 
15.43

 
14.26

 
13.19

 
12.30

Market price at year end
$
33.40

 
$
28.93

 
$
15.32

 
$
10.98

 
$
14.38

Dividend payout ratio
2.04
%
 
2.53
%
 
4.55
%
 
9.30
%
 
n/m

Performance Ratios
 
 
 
 
 
 
 
 
 
Return on average common equity
10.91
%
 
9.76
%
 
5.76
%
 
2.98
%
 
-1.20
 %
Return on average assets
1.04
%
 
0.90
%
 
0.60
%
 
0.36
%
 
0.01
 %
Return on average tangible common equity (2)
11.90
%
 
10.82
%
 
6.54
%
 
3.43
%
 
-1.24
 %
Net interest margin (2)
3.22
%
 
3.23
%
 
3.42
%
 
3.49
%
 
3.38
 %
Efficiency ratio (2)(5)
54.22
%
 
56.35
%
 
61.28
%
 
59.48
%
 
60.19
 %

33

ITEM 6. SELECTED FINANCIAL DATA (continued)

 
December 31,
(Dollars in thousands)
2014
 
2013
 
2012
 
2011
 
2010
Credit Quality (3)
 
 
 
 
 
 
 
 
 
Nonperforming loans
$
67,544

 
$
94,238

 
$
138,780

 
$
259,852

 
$
365,880

OREO
17,416

 
28,548

 
81,880

 
125,729

 
88,728

Total nonperforming assets
$
84,960

 
$
122,786

 
$
220,660

 
$
385,581

 
$
454,608

Restructured loans accruing interest
$
22,745

 
$
20,176

 
$
60,980

 
$
100,909

 
$
87,576

Net charge-offs
$
3,780

 
$
49,472

 
$
101,053

 
$
161,782

 
$
190,891

Total nonperforming loans to total loans
0.57
%
 
0.89
%
 
1.37
%
 
2.88
%
 
4.01
%
Total nonperforming assets to total assets
0.54
%
 
0.87
%
 
1.57
%
 
3.11
%
 
3.65
%
Allowance for loan losses to total loans
1.28
%
 
1.34
%
 
1.59
%
 
2.13
%
 
2.44
%
Balance Sheet Highlights
 
 
 
 
 
 
 
 
 
Total assets
$
15,603,382

 
$
14,085,746

 
$
14,057,515

 
$
12,416,870

 
$
12,465,621

Average earning assets
14,206,113

 
13,129,470

 
12,369,945

 
11,746,032

 
11,978,364

Loans (3)
11,892,219

 
10,644,021

 
10,139,982

 
9,008,561

 
9,114,357

Allowance for loan losses (3)
152,498

 
143,109

 
161,417

 
191,594

 
222,821

Deposits, excluding deposits held-for-sale
13,089,968

 
12,013,641

 
12,173,634

 
10,392,854

 
10,535,429

Noninterest-bearing deposits
3,516,695

 
3,172,676

 
3,690,340

 
3,244,307

 
2,253,661

Long-term debt
344,788

 
627,793

 
499,793

 
379,793

 
414,793

Equity
1,481,679

 
1,301,904

 
1,207,166

 
1,296,752

 
1,227,910

Capital Ratios
 
 
 
 
 
 
 
 
 
Total risk-based capital
12.51
%
 
13.30
%
 
13.17
%
 
14.28
%
 
14.18
%
Tier 1 risk-based capital
10.49
%
 
11.08
%
 
10.51
%
 
12.38
%
 
12.06
%
Tier 1 leverage ratio
9.96
%
 
10.37
%
 
9.56
%
 
11.40
%
 
10.84
%
Tier 1 common equity to risk-weighted assets (2)(6)
9.33
%
 
9.19
%
 
8.52
%
 
8.04
%
 
7.69
%
Tangible common equity to tangible assets (2)(7)
8.91
%
 
8.57
%
 
7.88
%
 
7.69
%
 
7.10
%
Average equity to average assets
9.56
%
 
9.22
%
 
10.12
%
 
10.29
%
 
9.93
%
Selected Information
 
 
 
 
 
 
 
 
 
Assets under management and administration
$
6,644,113

 
$
5,731,980

 
$
5,196,094

 
$
4,303,547

 
$
4,271,602

Full-time equivalent employees
1,168

 
1,116

 
1,105

 
1,045

 
1,060

 
(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 30 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 intangibles 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) 
For purposes of our presentation, we calculate this ratio in accordance with the applicable regulations of the Board of Governors of the Federal Reserve System and do not give effect to the final Basel III capital rules that are effective January 1, 2015.
(7) 
Computed as tangible common equity divided by tangible assets, where tangible common equity equals total equity less preferred stock, goodwill, and other intangible assets and tangible assets equals total assets less goodwill and other intangible assets.
n/m
Not meaningful.


34

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

INTRODUCTION

The following discussion and analysis is intended to address the significant factors affecting our Consolidated Statements of Income for the years 2012 through 2014 and Consolidated Statements of Financial Condition as of December 31, 2013 and 2014. 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 is designed to provide stockholders with a comprehensive review of our operating results and financial condition and 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.

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.

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 reserves for probable losses that have been identified relating to specific borrowing relationships that are individually evaluated for impairment ("the specific component"), as well as probable losses inherent in our loan portfolio that are not specifically identified ("the general allocated component"), which is determined using a methodology that is a function of quantitative and qualitative factors applied to segments of our loan portfolio as well as management’s judgment.

The specific component relates to impaired loans. Impaired loans consist of nonaccrual loans (which include nonaccrual troubled debt restructurings ("TDRs")) and loans classified as accruing TDRs. A loan is considered impaired when, based on current information and events, management believes that either 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 it has been classified as a TDR. 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 considered TDRs. 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, impairment is recognized by creating a specific valuation reserve as a component of the allowance for loan losses. Impaired loans exceeding $500,000 are evaluated individually, while loans less than $500,000 are evaluated as pools using historical loss experience, as well as management’s loss

35

expectations, for the respective asset class and product type. Of total impaired loans of $90.3 million at December 31, 2014, 75% had balances in excess of $500,000.

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 collateral appraisal. If the most recent appraisal is greater than one-year old, a new appraisal of the underlying collateral is obtained. The majority of collateral-dependent impaired loans are secured by real estate for which we generally obtain "as is" appraisal values in order 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. With a de minimis number of exceptions, all appraisals and internal reviews are current under this methodology at December 31, 2014.

To determine the general allocated component of the allowance for loan losses, we segregate loans by vintage ("transformational" and "legacy") and product type (e.g., commercial, commercial real estate) because of observable similarities in the historical performance experience of loans underwritten by these business units. In general, loans originated by the business units that existed prior to 2007 are considered "legacy" loans. Loans originated by a business unit that was established in connection with or following the implementation of our strategic business transformation plan in 2007 are considered "transformational" loans. Renewals or restructurings of legacy loans may continue to be evaluated as legacy loans depending on the structure or defining characteristics of the new transaction. We have implemented a line of business model that has reorganized the legacy business units so that after 2009, all new loan originations are considered transformational.

The general reserve methodology produces an estimated range of potential losses by product types within each vintage. The methodology also considers where a given product type is within the range of potential losses based on an estimate of the loss emergence period. The loss emergence period is an estimate of the length of time for potential losses embedded in the portfolio today to be recognized. Factors that affect the loss emergence period include the macroeconomic landscape, industry factors, and borrower specific performance. In general, the loss emergence period tends to lengthen in times of improving conditions and shortens in time of economic distress. During 2014, we formally measured the loss emergence period by analyzing recent historical loss data and information aggregated at the product level. This analysis showed that the loss emergence period is lengthening for most product categories. We consider the appropriate balance of the general allocated component of the reserve in relation to a variety of internal and external quantitative and qualitative factors to reflect data or timeframes not captured by the basic allowance framework as well as market and economic data and management judgment. In certain instances, these additional factors and judgments may lead management to conclude that the appropriate level of the reserve is outside the range determined through the basic allowance framework.

Determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans; estimated losses on pools of homogeneous loans based on historical loss experience, risk ratings, product type, and vintage; and consideration of current economic trends and portfolio attributes, all of which may be susceptible to significant change. For instance, loss factors in our allowance methodology typically reflect the Company’s more recent loss severity, by product, on a trailing twelve or eighteen month basis. These loss factors consider both cumulative charge-offs and other real estate owned ("OREO") valuation adjustments over the period in the individual product categories that we evaluate in our allowance model. Default estimates use a multi-year originating vintage and rating approach. We also consider the loss emergence period based on our historical experience when evaluating the range of potential loss exposure. In addition, we compare current model-derived and historically-established reserve levels to recent charge-off trends and history in considering the appropriate final level of reserve 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 for loan losses to a level that, in management’s judgment, is appropriate to absorb probable losses in the loan portfolio as of the balance sheet date.

36


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 income approach, which estimates fair value based upon discounted cash flows ("DCF") 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.

We have the option at the time of our annual 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, 2014, we did not elect to perform a qualitative assessment and chose to proceed with the quantitative two-step test. As a result of our step one analysis, we determined that the fair value of both the Banking and Asset Management reporting units exceeded their respective carrying amounts. As such, both of our reporting units with allocated goodwill "passed" step one of the goodwill impairment test, and no further analysis was required to support the conclusion that goodwill was not impaired as of October 31, 2014. The Banking reporting unit's fair value exceeded its carrying amount by 97%, while the Asset Management reporting unit's fair value exceeded its carrying amount by approximately 250%. We are not aware of any events or circumstances subsequent to our annual goodwill impairment testing date of October 31, 2014 that would indicate impairment of goodwill allocated to the Banking and Asset Management reporting units at December 31, 2014.

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. For our annual impairment testing, we engage an independent valuation firm to assist in the computation of the fair value estimates of each reporting unit. In connection with obtaining an independent third-party valuation, management provides certain information and assumptions that are utilized in the calculations. Assumptions critical to the process include: forecasted earnings, which are developed for each segment by considering several key business drivers such as historical performance, forward interest rates (using forward interest rate curves to forecast future expected interest rates), anticipated loan and deposit growth, and industry and economic trends; discount rates; and credit quality assessments, among other considerations. We provide the best information available at the time to be used in these estimates and calculations. 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 2014, there were no events or circumstances to

37

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 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, 2014. 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, 2014, 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, 2014, we had tax reserves established relating to uncertain tax positions that, if recognized, would favorably affect our effective tax rate by $212,000.

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 15 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 to sell 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.

38


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 Level 3 inputs to the instrument's fair value measurement in its entirety. If Level 3 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.

OVERVIEW

We reported net income available to common stockholders of $153.1 million for 2014, an increase of 25% from the $122.9 million reported for 2013. Diluted earnings per share was $1.94 for 2014, increasing 24% compared to $1.57 per share for 2013. Our return on average assets grew to 1.04% and our return on average common equity grew to 10.9%, both meaningful improvements from a year ago when these performance ratios were 0.90% and 9.8%, respectively. Our efficiency ratio was 54.2% for the year ended December 31, 2014, comparable to 56.4% for the year ended December 31, 2013.

Compared to 2013, the increase in earnings for the current year was primarily attributable to higher net interest income as a result of significant loan growth over the past year, as well as reduced credit-related costs, including lower provision for loan losses. These same factors contributed to an increase in operating profit of $28.5 million to $263.5 million for 2014 compared to $235.0 million for 2013. Net revenue was $575.6 million, up $37.3 million from 2013, as loan growth and lower funding costs offset the impact of declining loan yields. Net interest income for the year increased $33.7 million compared to 2013, driven by higher interest income on $1.1 billion growth in average interest-earning assets compared to the prior year and reduced cost of funds. Net interest margin remained stable at 3.22% for 2014 compared to 3.23% for the prior year. Non-interest income for the current year increased $3.6 million to $117.6 million compared to 2013 primarily due to a 45% increase in loan syndication fees, along with an increase in treasury management revenue, offset by declines in capital markets and mortgage banking income. Non-interest expense increased 3% from prior year, primarily driven by higher salary expense due to a larger employee base and increased incentive compensation costs tied to performance, offset by a meaningful decline in various credit-related costs as a result of the reduced level of other real estate owned ("OREO") and problem loans.

Our credit quality metrics hit their lowest levels since 2008 and are largely beginning to level off. As of December 31, 2014, nonperforming assets declined 31% from year end 2013 levels and was largely attributable to payoffs and paydowns of nonperforming loans and sales of OREO and nonperforming loans. At December 31, 2014, other real estate owned was $17.4 million, a reduction of $11.1 million from December 31, 2013. Nonperforming assets to total assets were 0.54% at December 31, 2014, compared to 0.87% at December 31, 2013. Nonperforming loans to total loans were 0.57% at December 31, 2014, compared to 0.89% at December 31, 2013. Net charge-offs totaled $3.8 million in 2014 as compared to $49.5 million in 2013, while the provision for loan losses declined $19.8 million to $12.0 million in 2014, compared to $31.8 million in 2013. At December 31, 2014, our allowance for loan losses as a percentage of total loans was 1.28%, compared to 1.34% at December 31, 2013.

Total loans grew 12% to $11.9 billion at December 31, 2014, from $10.6 billion at December 31, 2013, primarily driven by commercial and industrial loans to new clients. We also had a meaningful increase in unfunded commitments, primarily in our

39

commercial and industrial portfolio and construction portfolio, to support our client's future business needs. Total commercial and industrial loans comprised 66% of total loans at December 31, 2014, compared to 67% at December 31, 2013.

Total deposits at December 31, 2014 increased 9% to $13.1 billion from December 31, 2013 primarily driven by increases in noninterest-bearing and money market deposits. Money market accounts comprise 37% of total deposits while noninterest-bearing demand comprise 27% of total deposits at December 31, 2014. Given the commercial focus of our core business strategy, a majority of our deposit base is interest-bearing deposits comprised of corporate accounts, which are typically larger than retail accounts, and are heavily influenced by the cash positions of our commercial middle market clients, which will fluctuate based on their business needs.

Sale of Banking Office in Georgia

In fourth quarter 2014, we entered into a purchase and assumption agreement to sell our banking office in Norcross, Georgia. The transaction included the sale of certain deposits and loans made to retail and small business banking clients, which at December 31, 2014 totaled $122.2 million of deposits and $36.3 million of loans, each classified as held-for-sale. On January 20, 2015, we completed the sale and as a result recognized a gain of $4.3 million on the transaction, with $4.0 million of the gain recognized in the first quarter 2015. At consummation of the transaction, the amount of loans and deposits sold totaled $36.7 million and $106.9 million, respectively. The sale did not impact clients associated with our commercial middle market business development office in downtown Atlanta.

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

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 loss experience as well as economic and market factors. Non-interest income consists primarily of fee revenue from asset management, mortgage banking, capital markets products, 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 our 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, repricing frequencies, and loan repayment behavior; and (5) 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 reflect the impact of returns on certain tax-exempt 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. Refer to Table 30, "Non-U.S. GAAP Financial Measures," for a reconciliation of the effect of the tax-equivalent adjustment.

40


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, 2014. The table also presents the trend in net interest margin on a quarterly basis for 2014 and 2013, including the tax-equivalent yields on interest-earning assets and rates paid on interest-bearing liabilities. In addition, Table 2 details variances in income and expense for each of the major categories of interest-earning assets and interest-bearing liabilities and indicates the extent to which such variances are attributable to volume and rate changes.


41

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

 
2014
 
 
2013
 
 
2012
 
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
$
309,535

 
$
770

 
0.25
%
 
 
$
261,865

 
$
652

 
0.25
%
 
 
$
377,827

 
$
965

 
0.26
%
Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
2,279,054

 
53,500

 
2.35
%
 
 
2,189,426

 
51,310

 
2.34
%
 
 
2,064,893

 
56,826

 
2.75
%
Tax-exempt (2)
286,551

 
9,406

 
3.28
%
 
 
245,905

 
9,447

 
3.84
%
 
 
179,594

 
8,360

 
4.65
%
Total securities
2,565,605

 
62,906

 
2.45
%
 
 
2,435,331

 
60,757

 
2.49
%
 
 
2,244,487

 
65,186

 
2.90
%
FHLB stock
29,058

 
189

 
0.65
%
 
 
34,161

 
247

 
0.72
%
 
 
42,742

 
547

 
1.28
%
Loans, excluding covered assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
7,592,012

 
330,220

 
4.35
%
 
 
6,756,863

 
299,386

 
4.43
%
 
 
5,843,047

 
269,284

 
4.61
%
Commercial real estate
2,568,603

 
93,123

 
3.63
%
 
 
2,530,863

 
95,517

 
3.77
%
 
 
2,676,709

 
109,812

 
4.10
%
Construction
360,711

 
14,152

 
3.92
%
 
 
218,246

 
8,999

 
4.12
%
 
 
202,825

 
7,609

 
3.75
%
Residential
359,621

 
13,299

 
3.70
%
 
 
380,676

 
14,193

 
3.73
%
 
 
360,904

 
15,025

 
4.16
%
Personal and home equity
348,815

 
10,552

 
3.03
%
 
 
371,567

 
12,045

 
3.24
%
 
 
402,904

 
14,181

 
3.52
%
Total loans, excluding covered assets (3)
11,229,762

 
461,346

 
4.11
%
 
 
10,258,215

 
430,140

 
4.19
%
 
 
9,486,389

 
415,911

 
4.38
%
Covered assets (4)
72,153

 
2,409

 
3.34
%
 
 
139,898

 
3,689

 
2.64
%
 
 
218,500

 
7,300

 
3.34
%
Total interest-earning assets (2)
14,206,113

 
$
527,620

 
3.71
%
 
 
13,129,470

 
$
495,485

 
3.77
%
 
 
12,369,945

 
$
489,909

 
3.96
%
Cash and due from banks
154,334

 
 
 
 
 
 
147,185

 
 
 
 
 
 
145,200

 
 
 
 
Allowance for loan and covered loan losses
(161,001
)
 
 
 
 
 
 
(179,016
)
 
 
 
 
 
 
(208,577
)
 
 
 
 
Other assets
478,025

 
 
 
 
 
 
562,321

 
 
 
 
 
 
699,159

 
 
 
 
Total assets
$
14,677,471

 
 
 
 
 
 
$
13,659,960

 
 
 
 
 
 
$
13,005,727

 
 
 
 
Liabilities and Equity (5):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
1,289,190

 
$
3,728

 
0.29
%
 
 
$
1,292,146

 
$
4,202

 
0.33
%
 
 
$
829,686

 
$
3,378

 
0.41
%
Savings deposits
293,316

 
912

 
0.31
%
 
 
262,022

 
639

 
0.24
%
 
 
238,171

 
680

 
0.29
%
Money market accounts
4,966,272

 
15,945

 
0.32
%
 
 
4,490,908

 
15,711

 
0.35
%
 
 
4,129,620

 
16,924

 
0.41
%
Time deposits
2,623,243

 
21,366

 
0.81
%
 
 
2,647,301

 
20,161

 
0.76
%
 
 
2,589,593

 
21,832

 
0.84
%
Total interest-bearing deposits
9,172,021

 
41,951

 
0.46
%
 
 
8,692,377

 
40,713

 
0.47
%
 
 
7,787,070

 
42,814

 
0.55
%
Short-term borrowings
42,797

 
638

 
1.49
%
 
 
98,844

 
850

 
0.86
%
 
 
142,720

 
443

 
0.31
%
Long-term debt
618,556

 
27,061

 
4.37
%
 
 
477,782

 
29,612

 
6.20
%
 
 
402,812

 
23,846

 
5.92
%
Total interest-bearing liabilities
9,833,374

 
69,650

 
0.71
%
 
 
9,269,003

 
71,175

 
0.77
%
 
 
8,332,602

 
67,103

 
0.81
%
Noninterest-bearing demand deposits
3,308,345

 
 
 
 
 
 
2,982,471

 
 
 
 
 
 
3,186,562

 
 
 
 
Other liabilities
132,220

 
 
 
 
 
 
149,237

 
 
 
 
 
 
170,442

 
 
 
 
Equity
1,403,532

 
 
 
 
 
 
1,259,249

 
 
 
 
 
 
1,316,121

 
 
 
 
Total liabilities and equity
$
14,677,471

 
 
 
 
 
 
$
13,659,960

 
 
 
 
 
 
$
13,005,727

 
 
 
 
Net interest spread (2)(5)
 
 
 
 
3.00
%
 
 
 
 
 
 
3.00
%
 
 
 
 
 
 
3.15
%
Contribution of noninterest-bearing sources of funds
 
 
 
 
0.22
%
 
 
 
 
 
 
0.23
%
 
 
 
 
 
 
0.27
%
Net interest income/margin (2)(5)
 
 
457,970

 
3.22
%
 
 
 
 
424,310

 
3.23
%
 
 
 
 
422,806

 
3.42
%
Less: tax equivalent adjustment
 
 
3,233

 
 
 
 
 
 
3,247

 
 
 
 
 
 
2,873

 
 
Net interest income, as reported
 
 
$
454,737

 
 
 
 
 
 
$
421,063

 
 
 
 
 
 
$
419,933

 
 
(footnotes on following page)


42

Quarterly Net Interest Margin Trend
 
 
2014
 
2013
 
Fourth
 
Third
 
Second
 
First
 
Fourth
 
Third
 
Second
 
First
Yield on interest-earning assets (2)
3.57
%
 
3.72
%
 
3.69
%
 
3.72
%
 
3.69
%
 
3.71
%
 
3.77
%
 
3.75
%
Cost of interest-bearing liabilities (5)
0.73
%
 
0.71
%
 
0.69
%
 
0.70
%
 
0.73
%
 
0.75
%
 
0.78
%
 
0.80
%
Net interest spread (2)(5)
2.84
%
 
3.01
%
 
3.00
%
 
3.02
%
 
2.96
%
 
2.96
%
 
2.99
%
 
2.95
%
Contribution of noninterest-bearing sources of funds
0.23
%
 
0.22
%
 
0.21
%
 
0.21
%
 
0.22
%
 
0.22
%
 
0.23
%
 
0.24
%
Net interest margin (2)(5)
3.07
%
 
3.23
%
 
3.21
%
 
3.23
%
 
3.18
%
 
3.18
%
 
3.22
%
 
3.19
%
(1) 
Interest income included $26.4 million, $24.4 million, and $26.3 million in loan fees for the years ended December 31, 2014, 2013, and 2012, 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 30, "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 $82.7 million for 2014, $122.6 million for 2013, and $212.2 million for 2012 and are included in loans for purposes of this analysis. Interest foregone on impaired loans was estimated to be approximately $3.2 million for the year ended December 31, 2014, $4.8 million for 2013 and $8.9 million for 2012, 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 entitled "Covered Assets" for a detailed discussion.
(5) 
Includes deposits held-for-sale.


43

Table 2
Changes in Net Interest Income Applicable to Volumes and Interest Rates (1) 
(Amounts in thousands)
 
 
2014 compared to 2013
 
 
2013 compared to 2012
 
Volume
 
Rate
 
Total
 
 
Volume
 
Rate
 
Total
Federal funds sold and interest-bearing deposits in banks
$
119

 
$
(1
)
 
$
118

 
 
$
(290
)
 
$
(23
)
 
$
(313
)
Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
2,104

 
86

 
2,190

 
 
3,280

 
(8,796
)
 
(5,516
)
Tax-exempt (2)
1,441

 
(1,482
)
 
(41
)
 
 
2,720

 
(1,633
)
 
1,087

Total securities
3,545

 
(1,396
)
 
2,149

 
 
6,000

 
(10,429
)
 
(4,429
)
FHLB stock
(35
)
 
(23
)
 
(58
)
 
 
(95
)
 
(205
)
 
(300
)
Loans, excluding covered assets:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
36,413

 
(5,579
)
 
30,834

 
 
40,811

 
(10,709
)
 
30,102

Commercial real estate
1,409

 
(3,803
)
 
(2,394
)
 
 
(5,789
)
 
(8,506
)
 
(14,295
)
Construction
5,609

 
(456
)
 
5,153

 
 
604

 
786

 
1,390

Residential
(780
)
 
(114
)
 
(894
)
 
 
793

 
(1,625
)
 
(832
)
Personal and home equity
(714
)
 
(779
)
 
(1,493
)
 
 
(1,060
)
 
(1,076
)
 
(2,136
)
Total loans, excluding covered assets
41,937

 
(10,731
)
 
31,206

 
 
35,359

 
(21,130
)
 
14,229

Total interest-earning assets before covered assets (2)
45,566

 
(12,151
)
 
33,415

 
 
40,974

 
(31,787
)
 
9,187

Covered assets (3)
(2,093
)
 
813

 
(1,280
)
 
 
(2,277
)
 
(1,334
)
 
(3,611
)
Total interest-earning assets (2)
43,473

 
(11,338
)
 
32,135

 
 
38,697

 
(33,121
)
 
5,576

Interest-bearing demand deposits
(10
)
 
(464
)
 
(474
)
 
 
1,605

 
(781
)
 
824

Savings deposits
82

 
191

 
273

 
 
64

 
(105
)
 
(41
)
Money market accounts
1,586

 
(1,352
)
 
234

 
 
1,400

 
(2,613
)
 
(1,213
)
Time deposits
(852
)
 
2,057

 
1,205

 
 
783

 
(2,454
)
 
(1,671
)
Total interest-bearing deposits
806

 
432

 
1,238

 
 
3,852

 
(5,953
)
 
(2,101
)
Short-term borrowings
(636
)
 
424

 
(212
)
 
 
(172
)
 
579

 
407

Long-term debt
7,441

 
(9,992
)
 
(2,551
)
 
 
4,604

 
1,162

 
5,766

Total interest-bearing liabilities
7,611

 
(9,136
)
 
(1,525
)
 
 
8,284

 
(4,212
)
 
4,072

Net interest income (2)
$
35,862

 
$
(2,202
)
 
$
33,660

 
 
$
30,413

 
$
(28,909
)
 
$
1,504

(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 30, "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 an 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 detail discussion.

Net Interest Income - 2014 compared to 2013

Net interest income on a tax-equivalent basis increased $33.7 million, or 7.9%, to $454.7 million for the year ended December 31, 2014, compared to $424.3 million for the prior year. The growth in interest income for 2014 was largely due to $31.2 million in higher interest income on loans generated from $971.5 million increase in average loan balances and $2.1 million greater interest income on securities from $130.3 million in higher average securities balances. The increase was partially offset by $1.3 million in lower interest income due to a decline in average loan balances on the covered assets portfolio. The increase in net interest income also benefited from a $1.5 million decrease in interest expense driven primarily by a $2.6 million reduction in long-term debt interest expense attributable in part to a full year of interest savings on the retirement of $120 million of subordinated debt in fourth quarter 2013 and $1.7 million interest savings on the $75 million partial repayment of our 10% junior subordinated debentures ("10% Debentures") in fourth quarter 2014, offset by $2.4 million in accelerated issuance costs recognized in conjunction

44

with the 2014 redemption as well as, $1.2 million in higher deposit costs primarily due to higher average interest-bearing deposit balances. Based on our overall cost of funds, we expect the partial redemption of the 10% Debentures will positively impact net interest income by approximately $7.5 million on an annualized basis.

Average interest-earning assets grew $1.1 billion during 2014 primarily driven by $971.5 million growth in average loan balances with $835.1 million of the growth in the commercial and industrial portfolio and $142.5 million in the construction portfolio. Average interest-bearing deposits grew $479.6 million during 2014, reflecting an increase in average money market and savings deposits, partially offset by decreases in average time and interest-bearing demand deposits. In 2014, average short-term debt declined $56.0 million while average long-term debt increased $140.8 million, primarily as a result of FHLB short-term advances replaced by long-term advances in the current year period. Average long-term FHLB advances increased $255.6 million in 2014 compared to 2013 as we took advantage of favorable rates on a single $250 million, 2-year advance late in fourth quarter 2013. In addition, the average long-term debt in the current year reflected a prepayment of $120 million subordinated debt in the fourth quarter 2013.

Net interest margin was 3.22% for 2014, compared to 3.23% for 2013, as the improvements in our cost of funds was not enough to offset the decline in loan and securities yields. While LIBOR rates decreased slightly in 2014, loan yields benefited from our hedging program, increases in specialty lending activity, and non-recurring loan fees. Our commercial loan hedging program contributed 8 basis points to our loan yields during the year, compared to 6 basis points in 2013. Approximately two-thirds of our loan portfolio is comprised of commercial loans, which include specialty lines such as healthcare and security industry financing that can command pricing premiums due to the elevated complexity, risk, and industry expertise required. Non-recurring fee income of $1.6 million contributed 2 basis points to our loan yields in 2014, compared to $632,000 in 2013 that contributed 1 basis point. The 6 basis points reduction of cost of funds in 2014 was driven by reduced borrowing costs from the $120 million subordinated debt retirement in the fourth quarter 2013, partially offset by the net effect of the $75.0 million partial repayment of our 10% Debentures in fourth quarter 2014 as discussed above. Average noninterest-bearing deposits and average equity, our principal sources of non-interest bearing funds, increased in total by $470.2 million from 2013, but the lower interest rate environment continues to reduce their value within the net interest margin.

In the continued low interest rate environment, competition remains strong, which has influenced pricing. Future loan yields may be impacted by fluctuations in loan fees and interest income recognized as a result of recovery of interest on nonaccrual loans, acceleration of unamortized origination fees upon payoff or refinancing, prepayment and other fees received on certain event driven actions in accordance with the loan agreement. In the prolonged low interest rate environment, we have experienced a general decline in our loan core coupon yields (which excluded the effect of loan fees), primarily due to pricing compression on loan renewals and change in the composition of the portfolio. With over two-thirds of our loan portfolio indexed to one-month LIBOR, we would expect this trend to continue until there is a meaningful increase in interest rates. Despite the highly competitive environment, we maintain a selective and disciplined approach to structure, pricing and overall returns as we selectively add and develop client relationships. As discussed above, we continue to see some downward pressure on loan renewals, which remain very competitive, and has resulted in a compression on overall loan yields. Although we expect our net interest margin to benefit from a rise in short-term interest rates, it is more difficult to predict the impact on deposit costs as it depends on the mix of our funding sources, with wholesale and brokered deposits commanding higher rates.

Net Interest Income - 2013 compared to 2012

For 2013, net interest margin was 3.23%, a decline of 19 basis points from 3.42% for 2012. The year-over-year decline in net interest margin was primarily due to lower loan yields, driven by competitive pricing pressures and the low interest rate environment, decline in securities yields, and the cost of $125 million of subordinated debt issued in October 2012 in connection with the TARP restructure. Our cost of interest-bearing deposits declined $2.1 million, or 8 basis points. While lower interest rates were paid on interest-bearing deposits, interest rates on long-term debt increased 28 basis points as 2013 included $7.1 million of additional expense associated with the issuance of subordinated debt. Average noninterest-bearing deposits and average equity, our principal sources of noninterest-bearing funds, declined in total by $261.0 million from 2012.

Provision for loan losses

The provision for loan losses, excluding the provision for covered loans, totaled $13.2 million in 2014, down from $31.2 million in 2013 and $70.9 million in 2012. The provision for loan losses is a function of our allowance for loan loss methodology used to determine the allowance deemed adequate to cover inherent loan losses after net charge-offs have been deducted. The current year provision benefited from the reduced requirement for specific reserves on a smaller population of impaired loans. Impaired loans were $90.3 million at December 31, 2014, down from $114.4 million at December 31, 2013. In addition, the 2014 provision benefited from significantly lower charge-offs compared to prior years. Net charge-offs were $3.8 million in 2014, compared to $49.5 million in 2013 and $101.1 million in 2012. Future provision for loan losses may vary depending on loan growth or unevenness

45

in credit quality. For further analysis and information on how we determine the appropriate level for the allowance for loan losses and analysis of our credit quality, see "Critical Accounting Policies" and "Credit Quality Management and Allowance for Loan Losses."

Provision for covered loan losses

For 2014, the release of provision for covered loan losses was $1.1 million, compared to a provision of $632,000 in 2013 and $549,000 in 2012. The 2014 provision release was primarily attributable to $1.7 million of covered loan recoveries during 2014. The provision for covered loan losses represents the 20% portion of expected losses on covered loans that would not be subject to reimbursement by the FDIC. For further information regarding the FDIC-assisted transaction, see "Covered Assets."

Non-interest Income

Non-interest income is derived from a number of sources including fees from our asset management business, mortgage banking business and deposit services to our retail clients as well as 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. The following table presents a break-out of these multiple sources of revenue for the years ended December 31, 2014, 2013 and 2012.

Table 3
Non-interest Income Analysis
(Dollars in thousands)
 
 
Year Ended December 31,
 
% Change
 
2014
 
2013
 
2012
 
2014-2013
 
2013-2012
Asset management income:
 
 
 
 
 
 


 


Managed fee income
$
15,483

 
$
16,700

 
$
15,395

 
-7

 
8

Custodian fee income
1,785

 
1,677

 
1,622

 
6

 
3

Total asset management income
17,268

 
18,377

(1) 
17,017

(1) 
-6

 
8

Mortgage banking
10,245

 
12,172

 
13,460

 
-16

 
-10

Capital markets products
18,047

 
20,728

 
25,958

 
-13

 
-20

Treasury management
27,472

 
24,668

 
21,510

 
11

 
15

Loan, letter of credit and commitment fees
19,311

 
17,217

 
18,173

 
12

 
-5

Syndication fees
19,514

 
13,447

 
9,107

 
45

 
48

Deposit service charges and fees and other income
5,203

 
6,207

 
6,021

 
-16

 
3

Subtotal fee revenue
117,060

 
112,816

 
111,246

 
4

 
1

Net securities gains (losses)
530

 
1,174

 
(205
)
 
-55

 
673

Total non-interest income
$
117,590

 
$
113,990

 
$
111,041

 
3

 
3

(1) 
Includes $3.0 million and $3.4 million for the years ended December 31, 2013 and 2012, respectively, from Lodestar Investment Counsel, LLC ("Lodestar"), an investment management firm and previously a wholly-owned subsidiary of the Company, which was sold on December 31, 2013.

Non-interest Income - 2014 compared to 2013

Non-interest income for 2014 totaled $117.6 million, increasing $3.6 million, or 3% compared to the prior year reflecting growth in treasury management, loan, letter of credit and commitment fees, and syndication fees. These increases were partially offset by lower asset management, mortgage banking, capital markets products, and deposit service charges and fees and other income, and net securities gains.

Asset management fee revenue declined by $1.1 million, or 6%, from the prior year due in large part to the absence of revenue from Lodestar as a result of its sale at year-end 2013. Excluding the $3.0 million fee revenue recognized in 2013 from Lodestar, fee revenue was up $1.9 million, or 13%, driven by the increases in assets under management and administration ("AUMA") and improvement in the equity valuations due to improved market performance.

46


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

 
 
As of December 31,
 
% Change
 
 
2014
 
2013
 
2012
 
2014-2013
 
2013-2012
AUMA:
 
 
 
 
 
 
 
 
 
 
Managed assets
 
$
3,430,185

 
$
3,225,689

 
$
2,850,684

 
6
 
13
Custody assets
 
3,213,928

 
2,506,291

 
2,345,410

 
28
 
7
Total AUMA
 
$
6,644,113

 
$
5,731,980

 
$
5,196,094

(1) 
16
 
10
(1) 
Includes $503.3 million at December 31, 2012, of which at December 31, 2014 and 2013, $294.9 million and $281.6 million, respectively, was retained subsequent to the sale, primarily in custody assets.

AUMA grew to $6.6 billion at December 31, 2014 from $5.7 billion at December 31, 2013 with growth occurring largely in custody assets. The growth is primarily attributable to continued client acquisition, efforts at cross-selling asset management services to new clients, and to a lesser extent, equity valuation improvements. The pricing on asset management accounts varies depending on the type of services provided. Managed fee income includes fees earned on investment management, personal trust and estate administration, and retirement plan and brokerage services. Custodial fee income includes fees earned for the Bank acting as "qualified custodian," on escrow accounts, and for standard custody services, all of which have significantly lower fees recognized than on managed assets. Fees earned for acting as "qualified custodian" and on escrow assets are typically a flat structure while standard custody and managed assets are generally based on the market value of the assets on the last day of the prior quarter or month and therefore subject to market volatility.

Revenue from our mortgage banking business, which includes gains on loans sold and certain mortgage related loan fees, declined $1.9 million from $12.2 million in 2013 to $10.2 million in 2014. The decline is primarily due to a lower volume of loans sold in 2014 compared to 2013, which was partially offset by improved margins. We sold $359.6 million of mortgage loans in the secondary market, generating gains of $7.7 million, in 2014 compared to $514.7 million of mortgages loans sold, generating gains of $9.1 million, in the prior year. During the latter half of 2013, we saw a shift in product mix with a return to more normalized purchase activity levels while refinancing demand declined which is more heavily influenced by changes in interest rates.

Capital markets products income declined $2.7 million from 2013 and included a $46,000 negative credit valuation adjustment ("CVA") compared to a positive CVA of $2.2 million for 2013. The CVA represents the credit component of fair value with regard to both client-based derivatives and the related matched derivatives with interbank dealer counterparties. Exclusive of CVA, capital markets products income declined $409,000, or 2%, compared to 2013. The decrease was attributable to a shift toward a lower margin product mix by clients and a lower level of swap activity compared to the prior year due in part to reduced client demand. Our capital markets business opportunities are sensitive to the level of loan originations and our clients' outlook on interest rates.

Treasury management income increased $2.8 million, or 11%, from 2013. Revenue growth for these services is driven by the acquisition of new middle market commercial lending clients as an expansion to their credit relationships with the Bank, and influenced by the nature of the client's business; successful cross-sell and implementation of treasury management services may lag the closing of a credit facility by three to six months. The current year increase reflects the ongoing success in cross-selling treasury management services to new commercial clients as we continue to build client relationships. Similar to loan originations, we continue to experience increased pricing competition for treasury management services.

Loan, letter of credit and commitment fees increased $2.1 million, or 12%, from 2013, principally due to $516,000, or 6% increase in unused commitment fees and a $1.1 million, or 13% increase in standby letter of credit fees. The majority of our unused commitment fees related to revolving credit facilities, which at December 31, 2014 totaled $8.8 billion and, of which $4.8 billion were unused. In comparison, at December 31, 2013, commitments related to revolving credit facilities totaled $7.6 billion, of which $4.0 billion were unused and reflects the significant growth and expansion in client relationships during 2014.

Syndication fees increased $6.1 million from 2013 to $19.5 million in 2014, reaching its highest revenue in an individual year. During the year, we participated in 77 syndicated loan transactions (23 of which we led or co-led), totaling $3.5 billion in commitments, of which we retained $1.3 billion in commitments. In 2013, we participated in 57 syndicated loan transactions (51 of which we led or co-led), totaling $2.5 billion in commitments, while retaining $1.0 billion in commitments. We expect syndication opportunities to continue as we grow our loan portfolio, specifically commercial and commercial real estate loans. Syndication fees tend to fluctuate period to period depending on market conditions, loan origination trends, and portfolio management decisions.


47

Non-interest Income - 2013 compared to 2012

Non-interest income for 2013 was $114.0 million, an increase of $2.9 million, or 3%, compared to the prior year, reflecting growth in asset management, treasury management, syndication fees, deposit service charges and fees and other income, and net securities gains during the year. These increases were partially offset by lower mortgage banking, capital markets products, and loan, letter of credit and commitments fees.

Asset management fee revenue increased by $1.4 million, or 8% from 2012, and was largely attributed to fees associated with strong client growth, market recovery, and the on-boarding of a new strategic partnership in the latter part of the year. AUMA grew to $5.7 billion at December 31, 2013 from $5.2 billion at December 31, 2012 primarily due to new custodial assets added in 2013, net client growth, and improved market values all of which more than offset the reduction in AUMA related to the sale of Lodestar on December 31, 2013.

Revenue from our mortgage banking business declined $1.3 million, or 10%, from the prior year. The decline was primarily due to tighter spreads on a lower volume of loan originations and sales in 2013 compared to 2012 coupled with lower application volumes which was partially offset by an expanded product offering. We sold $514.7 million of mortgage loans in the secondary market, generating gains of $9.1 million, in 2013 compared to $561.5 million of mortgages loans sold, generating gains of $10.1 million, in the prior year. During the latter half of 2013, we saw a shift in product mix with purchase activity increasing while refinancing demand declined.

Capital markets products income decreased $5.2 million from 2012 and included a $2.2 million positive CVA compared to a positive CVA of $48,000 for 2012. Exclusive of CVA, capital markets income decreased to $18.5 million in 2013 from $25.9 million in 2012. The current period decline was attributable to lower level of loan origination-related swap activity and a shift in product mix by clients into transactions with lower margins.

Treasury management income increased $3.2 million, or 15%, from 2012. The 2013 increase reflects the ongoing success in cross-selling treasury management services to new commercial clients as we continue to build client relationships and, to a lesser extent, a decrease in our earnings credit rate (the rate applied to balances maintained in the client’s deposit account to offset activity charges) in the latter part of 2012 and 2013. Similar to loan originations, we experienced increased pricing competition with treasury management services.

Loan and credit-related fees decreased $1.0 million, or 5%, from 2012 and was largely due to a decline in unused commitment fees. The majority of our unused commitment fees related to revolving facilities, which at December 31, 2013 totaled $7.6 billion, of which $4.0 million were unused. In comparison, at December 31, 2012, commitments related to revolving facilities totaled $7.0 billion, of which $3.9 billion were unused.

Syndication fees increased $4.3 million from 2012 to $13.4 million in 2013 due to a higher volume of transactions, an increased demand from an expanded investor base, new product offerings, and improving pricing from both planned and opportunistic transactions recognized on origination in the fourth quarter of 2012 and throughout 2013.


48

Non-interest Expense

Table 4
Non-interest Expense Analysis
(Dollars in thousands)
 
 
Year Ended December 31,
 
% Change
 
2014
 
2013
 
2012
 
2014-2013
 
2013-2012
Compensation expense:
 
 
 
 
 
 
 
 
 
Salaries and wages
$
103,343

 
$
95,022

 
$
95,608

 
9

 
-1

Share-based costs
15,567

 
12,676

 
20,655

 
23

 
-39

Incentive compensation and commission
43,084

 
40,415

 
40,905

 
7

 
-1

Payroll taxes, insurance and retirement costs
20,198

 
18,816

 
17,780

 
7

 
6

Total compensation expense
182,192

 
166,929

 
174,948

 
9

 
-5

Net occupancy and equipment expense
31,258

 
30,027

 
30,571

 
4

 
-2

Technology and related costs
13,281

 
13,726

 
13,250

 
-3

 
4

Marketing
13,441

 
12,590

 
10,311

 
7

 
22

Professional services
11,761

 
8,539

 
8,353

 
38

 
2

Outsourced servicing costs
6,864

 
6,817

 
7,419

 
1

 
-8

Net foreclosed property expense
8,681

 
20,194

 
38,296

 
-57

 
-47

Postage, telephone, and delivery
3,400

 
3,521

 
3,497

 
-3

 
1

Insurance
12,451

 
10,867

 
15,186

 
15

 
-28

Loan and collection:
 
 
 
 
 
 
 
 
 
Loan origination and servicing expense
5,323

 
5,833

 
6,654

 
-9

 
-12

Loan remediation expense
1,442

 
2,920

 
4,977

 
-51

 
-41

Total loan and collection expense
6,765

 
8,753

 
11,631

 
-23

 
-25

Other operating expense:
 
 
 
 
 
 
 
 
 
Supplies and printing
688

 
721

 
976

 
-5

 
-26

Subscriptions and dues
1,238

 
945

 
655

 
31

 
44

Education and training
1,087

 
1,181

 
1,117

 
-8

 
6

Internal travel and entertainment
1,932

 
1,502

 
1,288

 
29

 
17

Investment manager expense
2,743

 
2,216

 
2,106

 
24

 
5

Bank charges
1,070

 
1,140

 
1,108

 
-6

 
3

Intangible amortization
3,007

 
3,121

 
2,684

 
-4

 
16

Provision for unfunded commitments
3,152

 
1,863

 
66

 
69

 
2,723

Other expenses
7,065

 
8,662

 
3,670

 
-18

 
136

Total other operating expenses
21,982

 
21,351

 
13,670

 
3

 
56

Total non-interest expense
$
312,076

 
$
303,314

 
$
327,132

 
3

 
-7

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

 
1,116

 
1,105

 
5

 
1

Operating efficiency ratios:
 
 
 
 
 
 
 
 
 
Non-interest expense to average assets
2.13
%
 
2.22
%
 
2.52
%
 
 
 
 
Net overhead ratio (1)
1.33
%
 
1.39
%
 
1.66
%
 
 
 
 
Efficiency ratio (2)
54.22
%
 
56.35
%
 
61.28
%
 
 
 
 
 
(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 30, "Non-U.S. GAAP Financial Measures," for a reconciliation of the effect of the tax-equivalent adjustment.


49

Non-interest Expense - 2014 compared to 2013

Non-interest expense increased by $8.8 million, or 3%, as compared to the prior year reflecting growth in the business offset by lower credit related costs. The increase primarily reflects higher compensation expense, professional services expense, insurance expense, and provision for unfunded commitments, which were partially offset by lower credit related costs (i.e., net foreclosed property expense and loan and collection expense) attributable to lower levels of nonperforming assets.

Compensation expense increased by $15.3 million, or 9%, from 2013, due to additions to staff, largely relationship bankers and staff to support our growing business, annual salary adjustments, and increased incentive compensation expense based on improved performance. Salary and wages were up $8.3 million, or 9%, primarily due to a higher FTEs base, as well as annual compensation adjustments. Share-based costs increased $2.9 million, or 23%, reflecting the full implementation of annual equity award programs which began in 2011. Incentive compensation was up by $2.7 million, or 7%, compared to 2013, due to improved performance and additional headcount, partially offset by the elimination of incentive costs in 2014 from the disposition of Lodestar in fourth quarter 2013.

Professional services expense, which includes fees paid for legal services in connection with corporate activities, accounting, and consulting services, increased $3.2 million, or 38%, from 2013, due to increases in consulting services for risk management, technology and support services.

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 OREO declined $11.5 million, or 57%, from 2013. The decline is primarily due to $13.0 million in lower OREO valuation write-downs compared to the prior year. In addition, OREO costs, such as property management and real estate taxes, were down $1.1 million from the prior year as our OREO declined from $28.5 million at December 31, 2013 to $17.4 million at December 31, 2014. This decrease was partially offset by net losses on the sale of OREO totaling $189,000 in 2014, compared to a gain on sale of $1.7 million in 2013 which had the effect of reducing expense in 2013. In 2014, total sales of OREO were $14.1 million, compared to $51.2 million in 2013. Refer to the "Foreclosed Real Estate" discussion in the "Loan Portfolio and Credit Quality" section below for more information regarding our OREO portfolio and valuation process.

Insurance expense increased $1.6 million, or 15%, from 2013, and was primarily due to higher FDIC deposit insurance in 2014 due to overall asset growth, increase in loan balances and certain loan classifications and a shift in our deposit mix. Also, deposit insurance expense for 2013 included $960,000 in prior period refunds on previously paid FDIC insurance assessments.

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, declined $2.0 million, or 23%, from 2013 primarily due to reduced costs related to a lower level of problem loans and, to a lesser extent, reduced mortgage origination costs on a lower volume of refinancing activity. Over the past three years, as a percentage of total loan and collection expenses, loan remediation costs have shifted from 43% in 2012 to 21% in 2014 as problem loans declined resulting in loan origination and servicing costs representing a larger portion of the total. Loan origination and servicing costs are influenced in part by the volume of mortgage origination activity.

Other operating expenses increased $631,000, or 3%, compared to the prior year period largely due to a $1.3 million increase in the provision for unfunded commitments which was driven by $1.3 billion growth in unfunded commitments during the year as to support the future business needs of new and existing commercial clients. Third-party investment management costs as part of our asset management business increased by $527,000 in 2014 with nearly one-half the increase attributable to costs that were previously eliminated in consolidation prior to the disposition of Lodestar. During 2014, other expenses included $1.3 million in lower restructuring, repurchased loan and other loss on sale of assets and miscellaneous operating losses compared to that recognized in 2013.

Our efficiency ratio was 54.2% for 2014, improving from 56.4% for 2013, reflecting revenue increasing at a higher percentage than our expenses, largely aided by lower credit-related costs. Further meaningful improvement in the efficiency ratio will likely depend on a rise in interest rates.

Non-interest Expense - 2013 compared to 2012

Non-interest expense totaled $303.3 million for 2013, decreasing by $23.8 million, or 7%, from $327.1 million in 2012. The decline reflects lower credit related costs (i.e. net foreclosed property expense and loan and collection expense) attributable to lower level of nonperforming assets, reduced compensation expense, and lower insurance expense combined with disciplined

50

expense management. The 2013 improvement was partially offset by higher other expense which included a number of non-recurring charges.

Compensation expense decreased overall by $8.0 million, or 5%, from 2012, principally benefiting from lower share-based costs. Share-based costs decreased $8.0 million, or 39%, due to final expense recognition in 2012 for certain share-based compensation awards made in 2007 and 2008 which was partially offset by $3.9 million in additional expense recognition relating to the February 2013 annual equity grants as part of our annual incentive and long-term incentive programs. Payroll taxes, insurance and retirement costs were up by $1.0 million, or 6%, compared to 2012, largely due to increased base compensation.

Marketing expense increased $2.3 million, or 22% compared to the prior year as a result of our new advertising and re-branding campaign in 2013.

Net foreclosed property expense decreased $18.1 million, or 47%, from 2012. The decline was primarily due to $5.8 million in lower OREO valuation write-downs compared to the prior year, as well as recognition of net gains on sales of OREO in 2013 of $1.7 million compared to net losses of sales of $6.0 million in 2012. In addition, property ownership costs, such as property management and real estate taxes, were down $3.5 million from the prior year as the population of OREO declined from $81.9 million at December 31, 2012 to $28.5 million at December 31, 2013.

Insurance expense decreased $4.3 million, or 28%, from 2012, primarily due to lower FDIC deposit insurance premiums reflecting improved credit quality, liquidity, and improvement in our deposit and funding mix compared to levels in 2012 which resulted in lower current year assessments. Also included in insurance costs for 2013 were $960,000 in refunds on previously paid deposit insurance assessments due to clarification of deposit rules under the assessment model.

Loan and collection expense decreased $2.9 million, or 25%, from 2012. At December 31, 2013, loan remediation costs declined $2.1 million as the level of problem loans declined 22% from 2012. Loan origination and servicing expense decreased $821,000 from reduced volumes of mortgage activity coupled with heightened expense management of credit related costs on new and renewed loans.

Other operating expenses increased $7.7 million, or 56%, from the prior year and was largely due to certain non-recurring charges that were incurred in 2013, including $2.7 million in restructuring costs associated with the vacating of excess space in the Detroit area and the restructuring of our Atlanta operation and a $1.2 million charge on repurchased loans. The provision for unfunded commitments also increased $1.8 million from 2012.

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 2012 through 2014 are presented in the following table.

Table 5
Income Tax Provision Analysis
(Dollars in thousands)
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
Income before income tax provision
$
248,207

 
$
199,943

 
$
132,417

Income tax expense
$
95,128

 
$
76,994

 
$
54,521

Effective income tax rate
38.3
%
 
38.5
%
 
41.2
%

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, non-deductible compensation and business expenses and tax credits.

For the year ended December 31, 2014 we recorded an income tax provision of $95.1 million on pre-tax income of $248.2 million (equal to a 38.3% effective tax rate) compared to an income tax provision of $77.0 million on pre-tax income of $199.9 million for the year ended December 31, 2013 (equal to a 38.5% effective tax rate).


51

While the 2014 effective tax rate remained relatively consistent with 2013, the lower effective tax rate in 2013 compared to 2012 was primarily due to the restoration of tax benefits for executive compensation subsequent to the repayment of TARP and the substantially greater amount of charges in the 2012 period associated with share-based compensation.

Realization of Deferred Tax Assets

Net deferred tax assets are included in other assets in the accompanying Consolidated Statements of Financial Condition and totaled $98.2 million at December 31, 2014, consisting of gross deferred tax assets of $121.8 million offset by gross deferred tax liabilities of $23.6 million.

We have concluded that it is more likely than not that the deferred tax assets will be realized and no valuation allowance was recorded. This conclusion was based in part on the fact that the Company was not in a cumulative book loss position for financial statement purposes at December 31, 2014, measured on a trailing three-year basis. In addition, we considered our recent earnings history, on both a book and tax basis, and our outlook for earnings and taxable income in future periods.

Taxable income in prior years and reversing deferred taxable temporary differences provide sources from which deferred tax assets may be absorbed. Most significantly, however, 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

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, and non-interest expense. The net income for the Banking segment for the year ended December 31, 2014 was $175.5 million, a $28.7 million increase from net income of $146.8 million for the year ended December 31, 2013. The increase was primarily due to $34.5 increase in net interest income due to 12% loan growth during the year and a $19.8 million decline in the provision for loan and covered loan losses compared to the prior year period, largely due to improvements in credit quality and a reduction in specific reserves on a smaller population of impaired loans. In addition, non-interest expense increased $12.8 million due to an increase in salaries and incentive compensation primarily driven by new hires, salary increases, and higher incentive compensation tied to improved performance. Net income for the Banking segment increased $38.7 million from the year ended December 31, 2012 to the year ended December 31, 2013, and was primarily due to a $39.6 million decline in the provision for loan and covered loan losses and a $23.8 million in lower non-interest expense compared to 2012.

Total loans for the Banking segment increased to $11.9 billion at December 31, 2014, compared to $10.6 billion at December 31, 2013. Total deposits increased to $13.2 billion at December 31, 2014 from $12.1 billion at December 31, 2013.

Asset Management

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

Net income from Asset Management increased slightly to $2.5 million for the year ended December 31, 2014, from $2.3 million for the year ended December 31, 2013, and increased from $1.6 million for the year ended December 31, 2012. The prior year period included nearly an equal amount of fees and costs generated by our investment management subsidiary, Lodestar, that we sold in December 2013, and of which we retained assets valued at $294.9 million at December 31, 2014. During 2014, the impact of the sale of Lodestar was offset by an increase in fees driven by the increase in AUMA, which grew to $6.6 billion at December 31, 2014, from $5.7 billion at December 31, 2013.

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

52

professional fees allocated to the Holding Company. The Holding Company Activities segment reported a net loss of $24.9 million for the year ended December 31, 2014, compared to a net loss of $26.2 million for the same period in 2013 and a net loss of $31.8 million for 2012. On October 8, 2014, the Holding Company redeemed $75.0 million of the $143.8 million outstanding 10% Debentures using available cash to fund the redemption. In connection with the redemption, $2.4 million in interest expense was recognized, representing a proportionate amount of the related unamortized debt issuance costs. We expect annual savings of $7.5 million in interest expense as a result of the redemption. The Holding Company received $100.0 million in dividends from the Bank during 2014, and had $60.6 million in cash at December 31, 2014 compared to $55.9 million at December 31, 2013.

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

Investment Portfolio Management

We manage our investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity needs, and to adjust balance sheet interest rate sensitivity to attempt to serve as some protection of net interest income levels against the impact of changes in interest rates.

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.

Investments are comprised of debt securities. Our debt securities portfolio is primarily comprised of residential mortgage-backed pools, collateralized mortgage obligations, and state and municipal bonds.

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 amortized cost and fair value of the portfolio and are reported, on an after-tax basis, as a separate component of equity in accumulated other comprehensive income ("AOCI"). This balance sheet component will fluctuate as current market interest rates and conditions change, with such changes affecting the fair value of the portfolio. In periods of significant market movement we may experience significant changes in AOCI.

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


53

Table 6
Investment Securities Portfolio Valuation Summary
(Dollars in thousands)
 
 
As of December 31, 2014
 
As of December 31, 2013
 
As of December 31, 2012
 
Fair
Value
 
Amortized
Cost
 
% of
Total
 
Fair
Value
 
Amortized
Cost
 
% of
Total
 
Fair
Value
 
Amortized
Cost
 
% of
Total
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
268,265

 
$
269,697

 
10
 
$
142,575

 
$
145,716

 
6
 
$
115,262

 
$
114,252

 
5
U.S. Agency securities
46,258

 
46,959

 
2
 
45,528

 
47,409

 
2
 
—

 
—

 
—
Collateralized mortgage obligations
136,933

 
132,633

 
5
 
176,116

 
169,775

 
7
 
241,034

 
229,895

 
10
Residential mortgage-backed securities
846,078

 
822,746

 
29
 
963,107

 
946,656

 
38
 
868,322

 
823,191

 
37
State and municipal securities
347,310

 
340,810

 
13
 
274,650

 
271,135

 
11
 
226,042

 
214,174

 
10
Foreign sovereign debt
500

 
500

 
*
 
500

 
500

 
*
 
500

 
500

 
*
Total available-for-sale
1,645,344

 
1,613,345

 
59
 
1,602,476

 
1,581,191

 
64
 
1,451,160

 
1,382,012

 
62
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
57,943

 
59,960

 
2
 
64,072

 
67,335

 
3
 
74,644

 
74,164

 
3
Residential mortgage-backed securities
892,162

 
885,235

 
32
 
673,773

 
688,410

 
27
 
725,448

 
703,419

 
31
Commercial mortgage-backed securities
181,437

 
183,021

 
7
 
157,973

 
164,607

 
6
 
86,213

 
85,680

 
4
State and municipal securities
1,073

 
1,069

 
*
 
1,090

 
1,084

 
*
 
469

 
464

 
*
Total held-to-maturity
1,132,615

 
1,129,285

 
41
 
896,908

 
921,436

 
36
 
886,774

 
863,727

 
38
Total securities
$
2,777,959

 
$
2,742,630

 
100
 
$
2,499,384

 
$
2,502,627

 
100
 
$
2,337,934

 
$
2,245,739

 
100
*    Less than 1%

As of December 31, 2014, our securities portfolio totaled $2.8 billion, an increase of $278.6 million, or 11%, compared to December 31, 2013. During 2014, purchases of securities totaled $682.9 million, with $349.3 million in the available-for-sale portfolio and $333.6 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 mortgage-backed securities, as well as purchases of U.S. Treasury securities and state and municipal securities.

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

Investments in collateralized mortgage obligations and residential and commercial mortgage-backed securities comprise 76% of the total portfolio at December 31, 2014. 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 composed of fixed-rate, fully-amortizing collateral with final maturities of 30 years or less.

Investments in debt instruments of state and local municipalities comprised 13% of the total portfolio at December 31, 2014. This type of security has historically experienced very low default rates and provided a predictable cash flow since it generally is not subject to significant prepayment. Insurance companies regularly provide credit enhancement to improve the credit rating and liquidity of a municipal bond issuance. Management considers the credit enhancement and underlying municipality credit strength when evaluating a purchase or sale decision.

At December 31, 2014, our reported equity reflected unrealized net securities gains on available-for-sale securities, net of tax, of $19.4 million, an increase of $6.5 million from December 31, 2013. 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.



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

Table 7
Investment Portfolio Activity
(Dollars in thousands)
 
 
December 31, 2014
 
 
Available-for-Sale
 
Held-to-Maturity
 
Balance at beginning of year
$
1,602,476

 
$
921,436

 
Additions:
 
 
 
 
Purchases
349,320

 
333,553

 
Reductions:
 
 
 
 
Sale proceeds
(74,690
)
 
—

 
Net gain on sale
530

 
—

 
Principal maturities, prepayments and calls, net of gains
(232,967
)
 
(120,844
)
 
Amortization of premiums and accretion of discounts
(10,039
)
 
(4,860
)
 
Total reductions
(317,166
)
 
(125,704
)
 
Increase in market value
10,714

 
—

(1) 
Balance at end of year
$
1,645,344

 
$
1,129,285

 
(1) 
The held-to-maturity portfolio is recorded at cost, with no adjustment for the $24.5 million unrealized loss in the portfolio at the beginning of 2014 or the increase in market value of $27.9 million for the year ended December 31, 2014 to an unrealized gain of $3.3 million.



The following table presents the maturities of the different types of investments that we owned at December 31, 2014 and the corresponding interest rates.
Table 8
Maturity Distribution and Portfolio Yields
(Dollars in thousands)
 
 
As of December 31, 2014
 
One Year or Less
 
One Year to Five Years
 
Five Years to Ten Years
 
After 10 years
 
 Amortized Cost
 
Yield to
Maturity
 
 Amortized Cost
 
Yield to
Maturity
 
 Amortized Cost
 
Yield to
Maturity
 
 Amortized Cost
 
Yield to
Maturity
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
—

 
—
%
 
$
269,697

 
1.10
%
 
$
—

 
—
%
 
$
—

 
—
%
U.S. Agency securities
—

 
—
%
 
46,959

 
1.30
%
 
—

 
—
%
 
—

 
—
%
Collateralized mortgage obligations (1)
5,227

 
4.91
%
 
127,406

 
3.20
%
 
—

 
—
%
 
—

 
—
%
Residential mortgage-backed securities (1)
8

 
5.05
%
 
610,074

 
3.26
%
 
211,944

 
2.15
%
 
720

 
7.56
%
State and municipal securities (2)
6,937

 
3.19
%
 
152,345

 
2.10
%
 
179,628

 
2.06
%
 
1,900

 
2.77
%
Foreign sovereign debt
500

 
1.51
%
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
Total available-for-sale
12,672

 
3.83
%
 
1,206,481

 
2.55
%
 
391,572

 
2.11
%
 
2,620

 
4.09
%
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations (1)
—

 
—
%
 
46,339

 
1.42
%
 
13,621

 
1.38
%
 
—

 
—
%
Residential mortgage-backed securities (1)
—

 
—
%
 
459,395

 
2.47
%
 
257,853

 
2.42
%
 
167,987

 
2.97
%
Commercial mortgage-backed securities (1)
—

 
—
%
 
108,655

 
1.57
%
 
74,366

 
2.24
%
 
—

 
—
%
State and municipal securities (2)
815

 
2.98
%
 
254

 
2.80
%
 
—

 
—
%
 
—

 
—
%
Total held-to-maturity
815

 
2.98
%
 
614,643

 
2.23
%
 
345,840

 
2.34
%
 
167,987

 
2.97
%
Total securities
$
13,487

 
3.78
%
 
$
1,821,124

 
2.44
%
 
$
737,412

 
2.22
%
 
$
170,607

 
2.99
%
(1) 
The repricing distributions and yields to maturity of collateralized mortgage obligations and mortgage-backed securities are based on average life of expected cash flows. Actual repricings and yields of the securities may differ from those reflected in the table depending upon actual interest rates and prepayment speeds.
(2) 
The maturity date of state and municipal bonds is based on contractual maturity, unless the bond, based on current market prices, is deemed to have a high probability that a call right will be exercised, in which case the call date is used as the maturity date.
 
LOAN PORTFOLIO AND CREDIT QUALITY (excluding covered assets)

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 an FDIC-assisted transaction that are subject to a loss share agreement and are presented separately on the Consolidated Statements of Financial Condition. For additional discussion of covered assets, refer to "Covered Assets" further in "Management's Discussion and Analysis" and Note 6 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.

Portfolio Composition

Total loans increased $1.2 billion to $11.9 billion as of December 31, 2014 from $10.6 billion at December 31, 2013, driven primarily by net loan growth in the commercial and industrial loan portfolio, which increased $832.4 million from year end 2013. New client activity of $1.6 billion and net increased borrowings from existing clients contributed to loan growth during the year and was primarily offset by payoffs. Our five-quarter trailing average loan growth is approximately $296.6 million at December 31, 2014, increasing $92.8 million, compared to $203.7 million a year ago. The growth rate is driven by a slowdown of payoffs in the legacy loan portfolio, which now makes up 5% of total loans at December 31, 2014, and greater quarterly new relationship growth. Commercial real estate loans increased $340.6 million from year end 2013, primarily due to construction projects being completed


and reclassified to commercial real estate, along with new client activity. Revolving line usage on the overall loan portfolio declined to 45% from 47% at December 31, 2013 as a result of increased commitments and paydowns during the year.

Our loan growth was strong for the year despite the level of competition in our markets from both bank and nonbank competitors. Overall loan growth continues to be impacted by the heightened competition which is affecting borrowers' expectations regarding both pricing and structure. Our strategy is to maintain a disciplined approach to pricing and structuring new credit opportunities and continue to develop comprehensive client relationships. Given the competitive environment, we may experience uneven loan growth from quarter-to-quarter. We remain selective and disciplined to structure, pricing and overall returns as we add and develop client relationships.

Much of our recent loan growth has been focused in commercial and industrial, which represents 66% of our portfolio at December 31, 2014. Within the commercial and industrial portfolio, the healthcare portfolio increased $223.4 million and the manufacturing portfolio increased $162.6 million from December 31, 2013. The commercial and industrial portfolio generally provides us higher yields, principally in specialty lines such as healthcare and security alarm financing, than other segments of our loan portfolio and also provides greater potential for cross-selling of other products and services.

In the normal course of our business, we participate in loan transactions that involve a number of banks, primarily to maintain and build client relationships with a view to cross-selling products and originating loans for the borrowers in the future. Although we may strive to lead or co-lead the arrangement, we will also participate with other banks when we have a relationship with the borrower. Loan syndications assist us with decreasing credit exposure linked to individual client relationships or loan concentrations by industry, type or size. Of our $11.9 billion in total loans outstanding at December 31, 2014, we were party to $4.0 billion of loans with other financial institutions. Included in this amount is $2.5 billion in SNC's, and $1.6 billion in held balances that were led or co-led by us. SNC transactions are typically led by larger institutions.

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

Table 9
Loan Portfolio
(Dollars in thousands)
 
 
December 31,
 
2014
 
% of
Total
 
 
2013
 
% of
Total
 
 
2012
 
% of
Total
 
 
2011
 
% of
Total
 
 
2010
 
% of
Total
Commercial
$
5,996,070

 
50
 
 
$
5,360,773

 
51
 
 
$
4,843,227

 
48
 
 
$
4,176,293

 
46
 
 
$
3,912,784

 
43
Commercial - owner-occupied CRE
1,892,564

 
16
 
 
1,695,479

 
16
 
 
1,608,091

 
16
 
 
1,134,229

 
13
 
 
895,625

 
10
Total commercial
7,888,634

 
66
 
 
7,056,252

 
67
 
 
6,451,318

 
64
 
 
5,310,522

 
59
 
 
4,808,409

 
53
Commercial real estate
2,323,616

 
20
 
 
2,062,889

 
19
 
 
2,177,529

 
21
 
 
2,247,103

 
25
 
 
2,484,042

 
27
Commercial real estate - multi-family
593,103

 
5
 
 
513,194

 
5
 
 
543,622

 
5
 
 
452,595

 
5
 
 
478,595

 
5
Total commercial real estate
2,916,719

 
25
 
 
2,576,083

 
24
 
 
2,721,151

 
26
 
 
2,699,698

 
30
 
 
2,962,637

 
32
Construction
381,102

 
3
 
 
293,387

 
3
 
 
190,496

 
2
 
 
287,002

 
3
 
 
530,733

 
6
Residential real estate
361,565

 
3
 
 
341,868

 
3
 
 
373,580

 
4
 
 
297,229

 
3
 
 
319,146

 
4
Home equity
142,177

 
1
 
 
149,732

 
1
 
 
167,760

 
2
 
 
181,158

 
2
 
 
197,179

 
2
Personal
202,022

 
2
 
 
226,699

 
2
 
 
235,677

 
2
 
 
232,952

 
3
 
 
296,253

 
3
Total loans
$
11,892,219

 
100
 
 
$
10,644,021

 
100
 
 
$
10,139,982

 
100
 
 
$
9,008,561

 
100
 
 
$
9,114,357

 
100
Growth vs. prior year–end
12
%
 
 
 
 
5
%
 
 
 
 
13
%
 
 
 
 
-1
 %
 
 
 
 
1
%
 
 


57

The following table summarizes the composition of our commercial loan portfolio at December 31, 2014 and 2013. Our commercial loan portfolio is categorized 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, 2014
 
December 31, 2013
 
Amount
 
% of Total
 
Amount
 
% of Total
Healthcare
$
1,787,092

 
23
 
$
1,563,646

 
22
Manufacturing
1,746,328

 
22
 
1,583,679

 
23
Finance and insurance
779,146

 
10
 
643,052

 
9
Wholesale trade
685,247

 
9
 
695,049

 
10
Real estate, rental and leasing
549,467

 
7
 
444,564

 
6
Administrative, support, waste management and remediation services
505,939

 
6
 
449,777

 
6
Professional, scientific and technical services
447,483

 
6
 
454,373

 
6
Architecture, engineering and construction
288,527

 
4
 
249,444

 
4
Retail
277,393

 
3
 
223,541

 
3
All other (1)
822,012

 
10
 
749,127

 
11
Total commercial (2)
$
7,888,634

 
100
 
$
7,056,252

 
100
(1) 
All other consists of numerous smaller balances across a variety of industries with no category greater than 3%.
(2) 
Includes owner-occupied commercial real estate of $1.9 billion and $1.7 billion at December 31, 2014 and 2013, respectively.

One of the largest segments within our commercial lending business is the healthcare industry. We have a specialized niche in the assisted living, skilled nursing, and residential care segment of the healthcare industry. Loan relationships to these providers tend to be larger extensions of credit and are primarily to for-profit businesses. At December 31, 2014, 23% of the commercial loan portfolio and 15% of the total loan portfolio was comprised of loans extended primarily to operators in this segment to finance the working capital needs and the cost of operating 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 certain government entities are taking longer to reimburse. Despite some impact on client cash flows as a result, to date the healthcare loan portfolio segment has experienced minimal defaults and losses.

Our manufacturing portfolio, representing 22% of our commercial and industrial lending business at December 31, 2014, is well diversified among industry and product types with a particular focus on serving clients in the key geographic markets in which we operate. The manufacturing industry segment is a key component of our core business. As the general market environment for manufacturing in our markets has improved over the past several years, the manufacturing segment of the loan portfolio has had a significant effect on the improvement in the credit performance of the commercial portfolio.

At December 31, 2014, approximately 10%, or $1.2 billion of our total loan portfolio was characterized as higher-risk (also referred to as leveraged loans) commercial and industrial loans, as defined for regulatory purposes, compared to 8% or $879.7 million as of December 31, 2013. Of the $286.7 million increase since year-end 2013, $279.7 million is due to new loans. Higher-risk commercial and industrial loans 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. These metrics were defined by the FDIC in late 2012. 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 due to their leveraged position, and typically have lower collateral coverage than similar commercial and industrial loans that are not classified as higher-risk. As a result, in the event of default, the loss potential may be greater for these types of loans versus similar commercial and industrial loans that are not classified as higher-risk.


58

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

Table 11
Commercial Real Estate and Construction Loan Portfolios by Collateral Type
(Dollars in thousands)
 
 
December 31, 2014
 
December 31, 2013
 
Amount
 
% of Total
 
Amount
 
% of Total
Commercial Real Estate
 
 
 
 
 
 
 
Retail
$
608,102

 
21
 
$
490,955

 
19
Multi-family
593,103

 
20
 
513,194

 
20
Office
543,657

 
19
 
470,315

 
18
Health care
361,476

 
12
 
258,828

 
10
Industrial/warehouse
264,976

 
9
 
271,721

 
11
Land
199,497

 
7
 
216,176

 
8
Residential 1-4 family
76,995

 
3
 
103,776

 
4
Mixed use/other
268,913

 
9
 
251,118

 
10
Total commercial real estate
$
2,916,719

 
100
 
$
2,576,083

 
100
Construction
 
 
 
 
 
 
 
Multi-family
$
113,206

 
30
 
$
58,131

 
20
Retail
100,086

 
26
 
83,640

 
28
Industrial/warehouse
43,779

 
11
 
29,343

 
10
Residential 1-4 family
32,419

 
9
 
20,960

 
7
Health care
22,382

 
6
 
43,506

 
15
Office
14,447

 
4
 
20,596

 
7
Mixed use/other
54,783

 
14
 
37,211

 
13
Total construction
$
381,102

 
100
 
$
293,387

 
100

Of the combined commercial real estate and construction portfolios, the three largest categories at December 31, 2014 were retail, multi-family and office real estate, which represent 22%, 21% and 17%, respectively of the combined portfolios. Our commercial real estate and construction portfolio strategy is focused on achieving market share in our core real estate classes in the key geographic markets in which we operate. The growth in commercial real estate and construction loans resulted from opportunities with real estate developers we have relationships with, and, in many cases, have done business with in the past. From an overall portfolio performance perspective, management believes the business execution plans of these borrowers continue to perform at a satisfactory level.

Within the commercial real estate portfolio, our exposure to land loans totaled $199.5 million at December 31, 2014 declining $16.7 million, or 8%, from $216.2 million at December 31, 2013. Land remains a less liquid asset class as buyers and sellers may hold divergent future development outlooks for the land, thereby affecting saleability and market prices. As a percentage of the commercial real estate portfolio, land loans were 7% and 8% at December 31, 2014 and 2013, respectively.

The construction portfolio totaled $381.1 million at December 31, 2014, an increase of $87.7 million, compared to $293.4 million at December 31, 2013 with the most significant increase in the multi-family category, somewhat offset by a sizeable decrease in healthcare as the loans were reclassified to commercial or commercial real estate at the expiration of the construction phase. The increase in the construction portfolio was driven by increased market activity as companies have additional capital to deploy, which has pushed values higher for properties in demand. Additionally, construction activity for retail, apartments and urban-infill continues to influence increased construction line utilization.


59

Maturity and Interest Rate Sensitivity of Loan Portfolio

The following table summarizes the maturity distribution of our loan portfolio as of December 31, 2014, by category, as well as the interest rate sensitivity of loans in these categories that have maturities in excess of one year.

Table 12
Maturities and Sensitivities of Loans to Changes in Interest Rates (1) 
(Amounts in thousands)
 
 
As of December 31, 2014
 
Due in         
1 year
or less
 
Due after 1
year through
5 years
 
Due after      
5 years
 
Total
Commercial
$
1,952,470

 
$
5,758,616

 
$
177,548

 
$
7,888,634

Commercial real estate
1,006,843

 
1,732,092

 
177,784

 
2,916,719

Construction
78,000

 
296,806

 
6,296

 
381,102

Residential real estate
10,435

 
3,944

 
347,186

 
361,565

Home equity
25,369

 
63,561

 
53,247

 
142,177

Personal
128,311

 
72,921

 
790

 
202,022

Total
$
3,201,428

 
$
7,927,940

 
$
762,851

 
$
11,892,219

Loans maturing after one year:
 
 
 
 
 
 
 
Predetermined (fixed) interest rates
 
 
$
178,103

 
$
195,318

 
 
Floating interest rates
 
 
7,749,837

 
567,533

 
 
Total
 
 
$
7,927,940

 
$
762,851

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

Of the $8.3 billion in loans maturing after one year with a floating interest rate, $1.3 billion are subject to interest rate floors, of which $1.2 billion have such floors in effect at December 31, 2014. For further analysis and information related to interest 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 within the term of the loan or failure to make the final payment at maturity. The majority of our loans are not fully amortizing over the term. As a result, a sizeable final repayment is often required at maturity. If a borrower lacks refinancing options or the ability to pay, the loan may become delinquent in connection with its maturity.

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

Special mention and potential problem loans as of December 31, 2014 and 2013 are presented in Table 17.


60

Nonperforming assets include nonperforming loans and real estate that has been acquired primarily through foreclosure proceedings and are awaiting disposition and are presented in Table 13. Nonperforming loans consist of nonaccrual loans, including restructured loans that remain on nonaccrual. We specifically exclude certain 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 collectibility of the principal or interest to be in question prior to the loans becoming 90 days past due. When interest accruals are discontinued, accrued but uncollected interest is reversed reducing interest income. Subsequent receipts on nonaccrual loans are recorded in the financial statements as a reduction of principal, and interest income is only recorded on a cash basis if the remaining recorded investment after charge-offs is deemed fully collectible. Classification of a loan as nonaccrual does not necessarily preclude the ultimate collection of loan principal and/or interest. Nonperforming loans are presented in Tables 13, 14, 15, and 17. Restructured loans that are accruing interest are also included in Tables 13 and 16.

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

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

As a result of our focused efforts in improving asset quality, we have seen a majority of our nonperforming asset credit quality metrics hit their lowest levels since 2008 and begin to largely level off. Nonperforming assets declined 31% to $85.0 million at December 31, 2014 from $122.8 million at December 31, 2013. The improvement in nonperforming assets was largely attributable to paydowns, payoffs, and sales. Nonperforming assets as a percentage of total assets were 0.54% at December 31, 2014, down from 0.87% at December 31, 2013.

OREO declined $11.1 million, or 39%, to $17.4 million at December 31, 2014, from $28.5 million at December 31, 2013, as inflows to OREO were more than offset by sales of OREO and valuation adjustments as we continued to dispose of and settle these properties. Refer to "Foreclosed Real Estate" below for further discussion on OREO.

Nonperforming loans totaled $67.5 million at December 31, 2014, down 28% from $94.2 million at December 31, 2013. Nonperforming loan inflows, which are primarily comprised of potential problem loans moving through the workout process (i.e., moving from potential problem to nonperforming status), declined 48% from 2013. As shown in Table 14, inflows to nonperforming loans in 2014 were more than offset by problem loan resolutions (paydowns, payoffs and return to accruing status), dispositions, and charge-offs. As shown in Table 15, which provides the nonperforming loan stratification by size, four nonperforming loans in excess of $3.0 million comprised 38% of our total nonperforming loans at December 31, 2014, compared to seven nonperforming loans in excess of $3.0 million which comprised 44% of our total nonperforming loans at December 31, 2013.

During 2014, we disposed of $43.2 million in problem assets, including $29.1 million in nonperforming loans, and $14.1 million in OREO. Problem loans (which include special mention, potential problem, and nonperforming loans) were $256.0 million at December 31, 2014, compared to $267.3 million at December 31, 2013. Because our loan portfolio contains loans that may be larger in size in order to accommodate the financing needs of some of our borrowers, changes in the performance of larger credits could create volatility and fluctuations in our credit quality metrics, including nonperforming loans, special mention and problem loans, and accruing TDR loans.

Accruing TDRs totaled $22.7 million at December 31, 2014, increasing $2.6 million, or 13%, from $20.2 million at December 31,

61

2013. As presented in the accruing TDR rollforward at Table 16, new accruing TDRs totaling $37.1 million during 2014 were largely offset by $31.0 million in paydowns and payoffs during the year ended December 31, 2014.

The following table provides a comparison of our nonperforming assets, restructured loans accruing interest, and past due loans for the past five years.

Table 13
Nonperforming Assets and Restructured and Past Due Loans
(Dollars in thousands)
 
 
 
December 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
Nonaccrual loans:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
31,047

 
$
24,779

 
$
41,913

 
$
65,958

 
$
70,241

Commercial real estate
 
19,749

 
46,953

 
68,554

 
133,257

 
214,629

Construction
 
—

 
—

 
557

 
21,879

 
33,403

Residential real estate
 
5,274

 
9,976

 
11,224

 
14,589

 
14,841

Personal and home equity
 
11,474

 
12,530

 
16,532

 
24,169

 
32,766

Total nonaccrual loans
 
$
67,544

 
$
94,238

 
$
138,780

 
$
259,852

 
$
365,880

90 days past due loans (still accruing interest)
 
—

 
—

 
—

 
—

 
—

Total nonperforming loans
 
$
67,544

 
$
94,238

 
$
138,780

 
$
259,852

 
$
365,880

OREO
 
17,416

 
28,548

 
81,880

 
125,729

 
88,728

Total nonperforming assets
 
$
84,960

 
$
122,786

 
$
220,660

 
$
385,581

 
$
454,608

 
 
 
 
 
 
 
 
 
 
 
Nonaccrual troubled debt restructured loans (included in nonaccrual loans):
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
20,113

 
$
6,188

 
$
25,200

 
$
28,409

 
$
1,247

Commercial real estate
 
8,005

 
19,309

 
29,426

 
32,722

 
45,028

Construction
 
—

 
—

 
—

 
960

 
—

Residential real estate
 
1,881

 
2,239

 
2,867

 
3,592

 
1,350

Personal and home equity
 
6,299

 
4,446

 
7,299

 
9,721

 
17,656

Total nonaccrual troubled debt restructured loans
 
$
36,298

 
$
32,182

 
$
64,792

 
$
75,404

 
$
65,281

 
 
 
 
 
 
 
 
 
 
 
Restructured loans accruing interest:
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
21,124

 
$
17,635

 
$
44,267

 
$
42,569

 
$
8,017

Commercial real estate
 
199

 
950

 
14,758

 
41,348

 
60,019

Construction
 
—

 
—

 
—

 
—

 
4,348

Residential real estate
 
—

 
—

 
465

 
3,238

 
798

Personal and home equity
 
1,422

 
1,591

 
1,490

 
13,754

 
14,394

Total restructured loans accruing interest
 
$
22,745

 
$
20,176

 
$
60,980

 
$
100,909

 
$
87,576

30-89 days past due loans
 
$
11,816

 
$
8,870

 
$
18,470

 
$
28,322

 
$
48,697

Nonperforming loans to total loans
 
0.57
%
 
0.89
%
 
1.37
%
 
2.88
%
 
4.01
%
Nonperforming loans to total assets
 
0.43
%
 
0.67
%
 
0.99
%
 
0.99
%
 
2.09
%
Nonperforming assets to total assets
 
0.54
%
 
0.87
%
 
1.57
%
 
3.11
%
 
3.65
%


62

The following table presents changes in our nonperforming loans for the years ended December 31, 2014 and 2013.

Table 14
Nonperforming Loans Rollforward
(Amounts in thousands)
 
December 31,
 
2014
 
2013
Nonperforming loans:
 
 
 
Balance at beginning of year
$
94,238

 
$
138,780

Additions:
 
 
 
New nonaccrual loans (1)
54,028

 
103,245

Reductions:
 
 
 
Return to performing status
(558
)
 
(2,658
)
Paydowns and payoffs, net of advances
(40,090
)
 
(29,800
)
Net sales
(17,055
)
 
(30,967
)
Transfer to OREO
(8,753
)
 
(17,310
)
Transfer to loans held for sale
—

 
(9,599
)
Charge-offs
(14,266
)
 
(57,453
)
Total reductions
(80,722
)
 
(147,787
)
Balance at end of year
$
67,544

 
$
94,238

 
 
 
 
Nonaccruing troubled debt restructured loans (included in nonperforming loans):
 
 
 
Balance at beginning of period
$
32,182

 
$
64,792

Additions:
 
 
 
New nonaccrual troubled debt restructured loans (1)
25,067

 
31,409

Reductions:
 
 
 
Return to performing status
—

 
(1,828
)
Paydowns and payoffs, net of advances
(15,181
)
 
(11,487
)
Net sales
(4,456
)
 
(16,136
)
Transfer to OREO
(685
)
 
(5,060
)
Transfer to loans held-for-sale
—

 
(2,240
)
Charge-offs
(629
)
 
(27,268
)
Total reductions
(20,951
)
 
(64,019
)
Balance at end of period
$
36,298

 
$
32,182

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


63

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

Table 15
Nonperforming Loans Stratification
(Dollars in thousands)
 
Stratification
 
$10.0 Million
or More
 
$5.0 Million to
$9.9 Million
 
$3.0 Million to
$4.9 Million
 
$1.5 Million to
$2.9 Million
 
Under $1.5
Million
 
Total
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Nonperforming loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
13,079

 
$
5,231

 
$
3,460

 
$
—

 
$
9,277

 
$
31,047

Commercial real estate
—

 
—

 
3,752

 
5,669

 
10,328

 
19,749

Residential real estate
—

 
—

 
—

 
—

 
5,274

 
5,274

Personal and home equity
—

 
—

 
—

 
—

 
11,474

 
11,474

Total nonperforming loans
$
13,079

 
$
5,231

 
$
7,212

 
$
5,669

 
$
36,353

 
$
67,544

Nonaccruing restructured loans (included in nonperforming loans):
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
13,079

 
$
—

 
$
3,460

 
$
—

 
$
3,574

 
$
20,113

Commercial real estate
—

 
—

 
—

 
2,004

 
6,001

 
8,005

Residential real estate
—

 
—

 
—

 
—

 
1,881

 
1,881

Personal and home equity
—

 
—

 
—

 
—

 
6,299

 
6,299

Total nonaccruing restructured loans
$
13,079

 
$
—

 
$
3,460

 
$
2,004

 
$
17,755

 
$
36,298

As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Nonperforming loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
—

 
$
9,393

 
$
3,749

 
$
5,150

 
$
6,487

 
$
24,779

Commercial real estate
—

 
15,440

 
9,035

 
7,583

 
14,895

 
46,953

Residential real estate
—

 
—

 
3,438

 
—

 
6,538

 
9,976

Personal and home equity
—

 
—

 
—

 
—

 
12,530

 
12,530

Total nonperforming loans
$
—

 
$
24,833

 
$
16,222

 
$
12,733

 
$
40,450

 
$
94,238

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

 
$
—

 
$
—

 
$
5,150

 
$
1,038

 
$
6,188

Commercial real estate
—

 
9,754

 
—

 
4,299

 
5,256

 
19,309

Residential real estate
—

 
—

 
—

 
—

 
2,239

 
2,239

Personal and home equity
—

 
—

 
—

 
—

 
4,446

 
4,446

Total nonaccruing restructured loans
$
—

 
$
9,754

 
$
—

 
$
9,449

 
$
12,979

 
$
32,182



64

The following table presents changes in our restructured loans accruing interest for the years ended December 31, 2014 and 2013.

Table 16
Restructured Loans Accruing Interest Rollforward
(Amounts in thousands)
 
December 31,
 
2014
 
2013
Balance at beginning of year
$
20,176

 
$
60,980

Additions:
 
 
 
New restructured loans accruing interest (1)
37,069

 
7,278

Reductions:
 
 
 
Paydowns and payoffs, net of advances
(31,025
)
 
(30,890
)
Transferred to nonperforming loans
(1,265
)
 
(15,032
)
Removal of restructured loan status (2)
(2,210
)
 
(2,160
)
Balance at end of year
$
22,745

 
$
20,176

(1) 
Amounts represent loan balances as of the end of the month in which loans were classified as new restructured loans accruing interest.
(2) 
At the time of re-underwriting, the loans were at market terms and an evaluation of the loans determined that they did not meet the definition of a TDR under current accounting guidance because they qualified as pass-rated credits due to the strengthened financial condition of the borrowers. All of these loans were re-underwritten in conjunction with the loan maturity.

We have adopted an internal risk rating policy in which each loan is rated for credit quality with a numerical rating of 1 through 8. Loans rated 5 and better (1-5 ratings, inclusive) are credits that we believe exhibit acceptable financial performance, cash flow, and leverage. We attempt to mitigate risk through loan structure, collateral, monitoring, and other credit risk management controls. Credits rated 6 are performing in accordance with contractual terms but are considered "special mention" as these credits demonstrate potential weakness that if left unresolved, may result in deterioration in 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. These loans continue to accrue interest but the ultimate collection of these loans in full is questionable due to the same conditions that characterize a 6-rated credit. These credits may also have somewhat increased risk profiles as a result of the current net worth and/or paying capacity of the obligor or guarantors or the value of the collateral pledged. These loans generally have a well-defined weakness that may jeopardize collection of the debt and are characterized by the distinct possibility that 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.


65

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

Table 17
Credit Quality
(Dollars in thousands)
 
Special
Mention
 
% of
Portfolio
Loan
Type
 
 
Potential
Problem
Loans
 
% of
Portfolio
Loan
Type
 
 
Non-
Performing
Loans
 
% of
Portfolio
Loan
Type
 
 
Total
Loans
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
93,130

 
1.2
 
 
$
78,562

 
1.0
 
 
$
31,047

 
0.4
 
 
$
7,888,634

Commercial real estate
3,552

 
0.1
 
 
746

 
*
 
 
19,749

 
0.7
 
 
2,916,719

Construction
—

 
—
 
 
—

 
—
 
 
—

 
—
 
 
381,102

Residential real estate
2,964

 
0.8
 
 
5,981

 
1.7
 
 
5,274

 
1.5
 
 
361,565

Home equity
1,170

 
0.8
 
 
2,108

 
1.5
 
 
11,044

 
7.8
 
 
142,177

Personal
173

 
0.1
 
 
45

 
*
 
 
430

 
0.2
 
 
202,022

Total
$
100,989

 
0.8
 
 
$
87,442

 
0.7
 
 
$
67,544

 
0.6
 
 
$
11,892,219

As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
62,272

 
0.9
 
 
$
87,391

 
1.2
 
 
$
24,779

 
0.4
 
 
$
7,056,252

Commercial real estate
1,016

 
*
 
 
4,489

 
0.2
 
 
46,953

 
1.8
 
 
2,576,083

Construction
—

 
—
 
 
—

 
—
 
 
—

 
—
 
 
293,387

Residential real estate
4,898

 
1.4
 
 
7,177

 
2.1
 
 
9,976

 
2.9
 
 
341,868

Home equity
2,884

 
1.9
 
 
2,538

 
1.7
 
 
11,879

 
7.9
 
 
149,732

Personal
187

 
0.1
 
 
177

 
0.1
 
 
651

 
0.3
 
 
226,699

Total
$
71,257

 
0.7
 
 
$
101,772

 
1.0
 
 
$
94,238

 
0.9
 
 
$
10,644,021

*
Less than 0.1%.

Foreclosed real estate

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


66

Table 18 presents a rollforward of OREO for the years ended December 31, 2014 and 2013. Table 19 presents the composition of OREO properties by category at December 31, 2014 and 2013.

Table 18
OREO Rollforward
(Amounts in thousands)
 
 
Year Ended December 31,
 
2014
 
2013
Beginning balance
$
28,548

 
$
81,880

New foreclosed properties
8,753

 
17,310

Valuation adjustments
(6,479
)
 
(19,458
)
Reclassification from covered asset OREO (1)
719

 
—

Disposals:
 
 
 
Sale proceeds
(13,936
)
 
(52,919
)
Net (loss) gain on sale
(189
)
 
1,735

Ending balance
$
17,416

 
$
28,548

(1) 
Represents amounts transferred from the covered asset OREO portfolio due to the expiration on September 30, 2014 of the FDIC loss share agreement on such assets.

Table 19
OREO Properties by Type
(Dollars in thousands)
 
 
December 31, 2014
 
December 31, 2013
 
Number
of Properties
 
Amount
 
% of
Total
 
Number
of Properties
 
Amount
 
% of
Total
Single-family homes
17

 
$
7,902

 
46
 
12

 
$
3,405

 
12
Land parcels
127

 
4,237

 
24
 
142

 
12,710

 
44
Multi-family
2

 
488

 
3
 
1

 
175

 
1
Office/industrial
6

 
3,832

 
22
 
20

 
11,301

 
40
Retail
2

 
957

 
5
 
1

 
957

 
3
Total OREO properties
154

 
$
17,416

 
100
 
176

 
$
28,548

 
100

OREO totaled $17.4 million at December 31, 2014, down 39% from $28.5 million at December 31, 2013. During the year ended December 31, 2014, inflows into OREO of $8.8 million were more than offset by OREO sales as we continue to dispose and settle these properties. During the year ended December 31, 2014, OREO sales totaled $14.1 million, with approximately 85% of these sales represented by land and office/industrial properties at approximated book value. Valuation adjustments on OREO for the year ended December 31, 2014 were $6.5 million, down $13.0 million from the year ended December 31, 2013.

At December 31, 2014, single-family homes represent the largest portion of OREO at 46%, OREO land parcels, which continues to be a fairly illiquid asset class, represented the next largest portion of OREO at 24%.

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

67

Credit Quality Management and Allowance for Loan Losses

We maintain an allowance for loan losses at a level management believes is sufficient to absorb credit losses inherent in the loan portfolio. The allowance for loan losses is assessed quarterly and represents an accounting estimate of probable losses in the portfolio at each balance sheet date based on a review of available and relevant information at that time. The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships that are considered to be impaired (the "specific component" of the allowance), as well as probable losses inherent in the loan portfolio that are not specifically identified (the "general allocated component" of the allowance), which is determined using a methodology that is a function of quantitative and qualitative factors and management judgment applied to defined segments of our loan portfolio.

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

At the time a collateral-dependent loan is initially determined to be impaired, we review the existing collateral appraisal. If the most recent appraisal is greater than one-year old, a new appraisal of the underlying collateral is obtained. The majority of collateral-dependent impaired loans are secured by real estate for which we generally obtain "as is" appraisal values in order 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.

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

As of December 31, 2014, the average appraisal age used in the impaired loan valuation process was approximately 151 days. The amount of impaired assets which, by policy, requires an independent appraisal, but does not have a current external appraisal at December 31, 2014 due to the timing of the receipt of the appraisal is not material. In situations such as this, we perform an internal assessment to determine if a probable impairment reserve is required for the account based on our experience in the related asset class and type.

The general allocated component of the allowance is determined using a methodology that is a function of quantitative and qualitative factors applied to segments of our loan portfolio. The methodology takes into account at a product level originating line of business (transformational or legacy), year of origination, the risk-rating migration of the loans, and historical default and loss history of similar products. Using this information, the methodology produces loss estimates which provide a range of possible reserve amounts

68

by product type. Use of the loss emergence period information by product type provides an important reference point for determining the appropriate range of reserves for a specific product category. We consider the appropriate balance of the general allocated component of the reserve within these ranges based on a variety of internal and external quantitative and qualitative factors to reflect data or timeframes not captured by the model as well as market and economic data, estimate of the loss emergence period and management judgment. We consider relevant factors related to individual product types and will also consider, when appropriate, changes in lending practices, changes in business or economic conditions, changes in the nature and volume of loans, changes in staffing or management, changes in the quality of our results from loan reviews, changes in collateral values, concentration risks, and other external factors such as legal or regulatory matters relevant to management’s assessment of required reserve levels. In certain instances, these additional factors and judgments may lead to management’s conclusion that the appropriate level of the reserve is outside the range determined through the quantitative framework with respect to a given product type.

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

In our evaluation of the quantitatively-determined range and the adequacy of the allowance at December 31, 2014, we considered a number of factors for each product that included, but were not limited to, the following:

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

In determining our reserve levels at December 31, 2014, we established a general reserve that includes management's qualitative assessment, which increased the reserve to higher output than our model's output range, in total. This judgment was influenced primarily by recent indicators in our transformational commercial portfolio, specifically, (i) increased movement into non-performing and criticized loan categories from certain industry sectors in the portfolio which can cause volatility in the reserve requirement, (ii) the impact of competition on loan structures, and (iii) leveraged lending transactions. In our transformational commercial real estate portfolio, this judgment was influenced by (i) less stringent underwriting standards in the marketplace leading to competitive credit structures and (ii) volume and nature of recent loan growth in the product segment.

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

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


69

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

Management evaluates the adequacy of the allowance for loan losses and reviews the underlying methodology with the Audit Committee of the Board of Directors quarterly. As of December 31, 2014, management concluded the allowance for loan losses was adequate (i.e., sufficient to absorb losses that are inherent in the portfolio at that date, including for those loans where the loss is not yet identifiable).

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

The accounting policies underlying the establishment and maintenance of the allowance for loan losses through provisions charged to operating expense are discussed more fully in Note 1 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.

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

Table 20
Allowance for Loan Losses and Summary of Loan Loss Experience
(Dollars in thousands)
 
 
Year Ended December 31,
2014
 
2013
 
2012
 
2011
 
2010
Change in allowance for loan losses:
 
 
 
 
 
 
 
 
 
Balance at beginning of year
$
143,109

 
$
161,417

 
$
191,594

 
$
222,821

 
$
221,688

Loans charged-off:
 
 
 
 
 
 
 
 
 
Commercial
(5,588
)
 
(22,339
)
 
(31,768
)
 
(32,742
)
 
(32,160
)
Commercial real estate
(6,214
)
 
(25,294
)
 
(68,099
)
 
(108,814
)
 
(100,467
)
Construction
(6
)
 
70

 
(1,979
)
 
(11,282
)
 
(27,499
)
Residential real estate
(1,514
)
 
(3,501
)
 
(3,010
)
 
(2,009
)
 
(4,735
)
Home equity
(1,017
)
 
(3,445
)
 
(3,128
)
 
(6,586
)
 
(3,708
)
Personal
(158
)
 
(3,725
)
 
(10,044
)
 
(9,594
)
 
(28,471
)
Total charge-offs
(14,497
)
 
(58,234
)
 
(118,028
)
 
(171,027
)
 
(197,040
)
Recoveries on loans previously charged-off:
 
 
 
 
 
 
 
 
 
Commercial
6,340

 
5,054

 
4,179

 
4,280

 
2,967

Commercial real estate
2,674

 
2,173

 
8,709

 
3,162

 
1,328

Construction
79

 
48

 
2,315

 
291

 
983

Residential real estate
675

 
15

 
126

 
61

 
33

Home equity
228

 
475

 
509

 
337

 
95

Personal
721

 
997

 
1,137

 
1,114

 
743

Total recoveries
10,717

 
8,762

 
16,975

 
9,245

 
6,149

Net charge-offs
(3,780
)
 
(49,472
)
 
(101,053
)
 
(161,782
)
 
(190,891
)
Provisions charged to operating expense
13,169

 
31,164

 
70,876

 
130,555

 
192,024

Balance at end of year
$
152,498

 
$
143,109


$
161,417


$
191,594

 
$
222,821

Allowance for loan losses as a percent of loans at year end
1.28
%
 
1.34
%
 
1.59
%
 
2.13
%
 
2.44
%
Average loans, excluding covered assets
$
11,199,985

 
$
10,228,385

 
$
9,457,541

 
$
8,915,750

 
$
8,980,368

Ratio of net charge-offs to average loans outstanding for the year
0.03
%
 
0.48
%
 
1.07
%
 
1.81
%
 
2.13
%
Allowance for loan losses as a percent of nonperforming loans
226
%
 
152
%
 
116
%
 
74
%
 
61
%

70


Gross charge-offs declined 75% to $14.5 million for 2014, from $58.2 million for 2013. Commercial real estate comprised 43% of total charge-offs in 2014, with 47% of total commercial real estate charge-offs related to two individual credits, while commercial comprised 39% of total charge-offs.

The allowance for loan losses increased $9.4 million from $143.1 million at December 31, 2013 to $152.5 million at December 31, 2014. The change in allowance levels were largely impacted by $1.2 billion in loan growth, changes in the composition of the loan portfolio, changes in the quantitative component of the allowance factors and partially offset by $26.7 million decline in nonperforming loans. The provision for loan losses for the year ended December 31, 2014 declined to $13.2 million compared to $31.2 million for the year ended December 31, 2013, and was aided by $10.7 million in recoveries of previously charged-off loans. The provision for loan losses may fluctuate quarter to quarter depending on the level of loan growth and unevenness in credit quality due to size of individual credits. The allowance for loan losses to total loans ratio was 1.28% at December 31, 2014, down from 1.34% as of December 31, 2013.

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

Table 21
Allocation of Allowance for Loan Losses
(Dollars in thousands)
 
 
As of December 31,
 
2014
 
% of
Total
 
2013
 
% of
Total
 
2012
 
% of
Total
 
2011
 
% of
Total
 
2010
 
% of
Total
Commercial
$
103,462

 
68
 
$
80,768

 
57
 
$
63,709

 
39
 
$
60,663

 
32
 
$
70,115

 
31
Commercial real estate
31,838

 
21
 
42,362

 
30
 
73,150

 
45
 
94,905

 
49
 
110,853

 
50
Construction
4,290

 
3
 
3,338

 
2
 
2,434

 
2
 
12,852

 
7
 
19,778

 
9
Residential real estate
5,316

 
3
 
7,555

 
5
 
9,696

 
6
 
6,376

 
3
 
5,321

 
2
Home equity
4,924

 
3
 
5,648

 
4
 
6,797

 
4
 
4,022

 
2
 
5,764

 
3
Personal
2,668

 
2
 
3,438

 
2
 
5,631

 
4
 
12,776

 
7
 
10,990

 
5
Total
$
152,498

 
100
 
$
143,109

 
100
 
$
161,417

 
100
 
$
191,594

 
100
 
$
222,821

 
100
Specific reserve
$
16,627

 
11
 
$
22,377

 
16
 
$
43,390

 
27
 
$
69,944

 
37
 
$
70,971

 
32
General reserve
$
135,871

 
89
 
$
120,732

 
84
 
$
118,027

 
73
 
$
121,650

 
63
 
$
151,850

 
68
Recorded Investment in Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance, specific reserve
$
90,289

 
 
 
$
114,414

 
 
 
$
199,760

 
 
 
$
360,761

 
 
 
$
453,456

 
 
Ending balance, general allocated reserve
11,801,930


 
 
10,529,607

 
 
 
9,940,222

 
 
 
8,647,800

 
 
 
8,660,901

 
 
Total loans at year end
$
11,892,219

 
 
 
$
10,644,021

 
 
 
$
10,139,982

 
 
 
$
9,008,561

 
 
 
$
9,114,357

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

General Allocated Component of the Allowance

The general allocated component of the allowance increased by $15.1 million, or 13%, during 2014, from $120.7 million at December 31, 2013 to $135.9 million at December 31, 2014. As presented in Table 21 above, over the past three years, the increase in the general allocated reserve has been primarily influenced by the increased reserve needs associated with the growing loan portfolio and changes in the credit quality of the existing portfolio for certain segments. In addition, lower loss rates are being applied to a larger portion of the total loan portfolio, most notably within commercial real estate, as the portfolio is becoming more weighted in transformational loans, where our historical credit performance has been better, and less weighted in legacy loans, where historical performance has been weaker.

Specific Component of the Allowance

Specific reserves are the summation of individual reserves related to impaired loans that are analyzed on an account by account basis at the balance sheet date. Once a loan is determined to be impaired, the amount of impairment is measured based on the loan’s

71

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. At December 31, 2014, the specific component of the allowance decreased by $5.8 million to $16.6 million from $22.4 million at December 31, 2013, continuing the trend from the previous five years as presented in Table 21 above. The change in the specific reserves over the past five years is due to the continued overall reduction in the impaired loan population. At December 31, 2014, impaired loans totaled $90.3 million, of which nearly all are collateral-dependent. Of the $90.3 million in impaired loans, 56% required a specific reserve at December 31, 2014, compared to 60% at December 31, 2013 of the $114.4 million in total impaired loans.

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, 2014, our reserve for unfunded commitments increased $3.1 million from December 31, 2013 to $12.3 million and consisted of $11.4 million in general reserves and $894,000 in specific reserves at December 31, 2014. For the year ended December 31, 2014, general reserves increased $3.0 million driven by a $1.3 billion increase in unfunded commitments as part of our overall 2014 growth in loan originations and new credit relationships, specifically in commercial and industrial and construction products, as well as an increase in the likelihood of draws on unused lines and loss factors. The remaining increase was related to specific credits. 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 $6.3 billion and $5.0 billion at December 31, 2014 and 2013, respectively. At December 31, 2014, unfunded commitments with maturities of less than one year approximated $2.0 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 purchased loans and foreclosed loan collateral covered under a loss sharing agreement with the FDIC as a result of the 2009 FDIC-assisted acquisition of the former Founders Bank from the FDIC. Under the loss share agreement, generally the FDIC will assume 80% of the first $173 million of credit losses and 95% of the credit losses in excess of $173 million, in both cases relating to assets that existed on the date of acquisition. As of December 31, 2014, the FDIC had reimbursed the Bank a total of $122.9 million in losses under the loss share agreement. The loss share agreement expired on September 30, 2014 for loans other than non-residential mortgage loans and related assets, and will expire on September 30, 2019 for residential mortgage assets.

Total net covered assets declined $67.3 million, or 70%, from $96.2 million at December 31, 2013 to $28.9 million at December 31, 2014. The decrease in balances from the prior year was partially due to $27.8 million in principal paydowns, net of advances, the impact of such on the evaluation of expected cash flows and discount accretion levels. Also contributing to the reduction was the transfer out of covered assets of $28.7 million of covered loans into our held for investment loan portfolio and $719,000 of covered OREO into the OREO portfolio upon the aforementioned expiration of the loss share agreement for non-residential mortgage assets. At December 31, 2014, the estimated loss reimbursement by the FDIC totaled $1.8 million compared to $6.3 million at December 31, 2013. 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 $7.0 million at December 31, 2014 and $17.3 million at December 31, 2013.

FUNDING AND LIQUIDITY MANAGEMENT

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

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



72



The Bank’s principal sources of funds are commercial and retail deposits, including large institutional deposits and brokered deposits. We first look toward internally generated deposits as our funding source for loan and asset growth. We also utilize FHLB borrowings and other wholesale funding, including traditional brokered time deposits, as needed to enhance liquidity and to fund asset growth. Cash from operations is also a source of funds. The Bank’s principal uses of funds include funding growth in the core asset portfolios, including loans, and to a lesser extent, our investment portfolio, which is used primarily to manage liquidity risk and interest rate risk.

The primary sources of funding for the Holding Company include dividends when received from the Bank, intercompany tax reimbursements from the Bank, and proceeds from the issuance of senior and subordinated debt, as well as equity. During 2014, the Bank paid $100.0 million in dividends to the Holding Company. In September 2014, the Holding Company amended and renewed its 364-day revolving line of credit from a group of commercial banks allowing borrowings of up to $60.0 million in total as an additional source of working capital. As of December 31, 2014, no amounts have been drawn on the facility. On October 8, 2014, using available cash resources, the Holding Company redeemed $75.0 million of the $143.8 million in outstanding 10% junior subordinated debentures. Net liquid assets at the Holding Company totaled $60.6 million at December 31, 2014 and $55.9 million at December 31, 2013.

Our cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Cash flows from operating activities primarily include results of operations for the period, adjusted for items in net income that did not impact cash. Net cash provided by operating activities decreased $145.7 million from 2013 to $94.6 million for 2014. Cash flows from investing activities reflect the impact of loans and investments acquired for our interest-earning asset portfolios and asset sales. For 2014, net cash used in investing activities was $1.5 billion, compared to $711.2 million for the prior year. This change in cash flows primarily represents larger amounts of cash redeployed towards the funding of loans in 2014. 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 2014 was $1.3 billion, compared to net cash used in financing activities of $30.5 million for the prior year. This change in cash flows primarily represents the increased level of deposits in 2014.

Deposits

Our deposit base is predominately comprised of middle market commercial client relationships from a diversified industry base. Through our community banking and private wealth groups, we offer a variety of small business and personal banking products, including checking, savings and money market accounts and CDs, which are a source of stable core deposits. Approximately 25% of our deposits at December 31, 2014 were accounts served in our community banking and private wealth groups.

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

Table 22
Deposits (1) 
(Dollars in thousands)
 
 
As of December 31,
 
% Change
 
2014
 
%
of Total
 
2013
 
%
of Total
 
2012
 
%
of Total
 
2014-2013
 
2013-2012
Noninterest-bearing deposits
$
3,516,695

 
27
 
$
3,172,676

 
26
 
$
3,690,340

 
30
 
11

 
-14

Interest-bearing demand deposits
1,907,320

 
15
 
1,470,856

 
12
 
1,057,390

 
9
 
30

 
39

Savings deposits
319,100

 
2
 
284,482

 
2
 
310,188

 
3
 
12

 
-8

Money market accounts
4,851,925

 
37
 
4,515,079

 
38
 
4,602,632

 
38
 
7

 
-2

Time deposits
2,494,928

 
19
 
2,570,548

 
22
 
2,513,084

 
20
 
-3

 
2

Total deposits
$
13,089,968

 
100
 
$
12,013,641

 
100
 
$
12,173,634

 
100
 
9

 
-1

 
Note: Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
(1) 
Excludes deposits held-for-sale of $122.2 million as of December 31, 2014.


73

Total deposits at December 31, 2014 increased by $1.1 billion from December 31, 2013, primarily driven by a 30%, or $436.5 million, increase in interest-bearing demand deposits and an 11%, or $344.0 million, increase in noninterest-bearing deposits. We tend to experience cyclically strong deposit growth in the latter half of the year. The deposit balances of our commercial clients may fluctuate depending on their cash management and liquidity needs, with historical outflows occurring in the first quarter of the year. The loan to deposit ratio was 91% at December 31, 2014 compared to 89% at December 31, 2013, and our total assets funded by deposits was 84% at December 31, 2014 and 85% at December 31, 2013.

During 2014 we undertook initiatives intended to create more deposit gathering opportunities, including opening a de novo banking office in the suburbs of Chicago (Lincolnwood) and establishing a specialized group to focus on providing banking services to bank and non-bank financial services companies.

Public fund balances, denoting the funds held on account for municipalities and other public entities, are included as a part of our total deposits. We enter into specific agreements with certain public clients to pledge collateral, primarily securities, in support of the balances on deposit. At December 31, 2014, we had public funds on account totaling $881.6 million. Changes in balances are influenced by the tax collection activities of the various municipalities as well as the general level of interest rates.

Given the commercial focus of our business, 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 with specific focus on treasury management products. As a result, a significant portion of our funding base is comprised of large, noninterest-bearing and interest-bearing deposits. The following table presents a comparison of our large deposit relationships as of the dates shown. Of our large deposit relationships shown in the table below, more than half of the deposits are financial-services related businesses.

Table 23
Large Deposit Relationships
(Amounts in thousands)

 
December 31,
 
2014
 
2013
 
2012
Ten largest depositors:
 
 
 
 
 
Deposit amounts
$
2,225,641

 
$
2,078,273

 
$
2,369,800

Percentage of total deposits
17
%
 
17
%
 
19
%
$75 Million or More:
 
 
 
 
 
Deposit amounts
$
3,285,598

 
$
2,614,321

 
$
3,111,289

Percentage of total deposits
25
%
 
22
%
 
26
%
Number of deposit relationships
22

 
16

 
18

Financial services-related business greater $75 million to total deposits
14
%
 
15
%
 
15
%
$50 Million or More:
 
 
 
 
 
Deposit amounts
$
3,870,857

 
$
3,260,544

 
$
3,633,244

Percentage of total deposits
30
%
 
27
%
 
30
%
Number of deposit relationships
32

 
27

 
27

Financial services-related business greater $50 million to total deposits
15
%
 
17
%
 
30
%

Deposit balances fluctuate as a result of client business and liquidity needs (which are in part cyclical), market and economic conditions, and the pricing and types of deposit products offered by the Bank. Although we expect overall liquidity in the banking system to remain high while the economy continues to recover and market factors continue to improve, if commercial deposit balances decline, we would expect to increase reliance on other sources of liquidity, including wholesale funding such as FHLB borrowings and traditional brokered time deposits.

Brokered Deposits

Our brokered deposits are maintained across various account types including demand deposit, money market and time. Certain deposits generated through the efforts of our commercial banking relationship managers, which we believe to be a stable cost-effective source of funding, consist of funds of the depositors' clients, and as such, are classified for regulatory reporting purposes as brokered. From a liquidity risk management perspective, however, we view these brokered deposits as different from traditional

74

brokered time deposits which are generated when we pay fees to a third party in return for sourcing time deposits for us. We have used traditional brokered time deposits as a source longer-term funding in our funding mix and to complement our internally generated deposits.

Total brokered deposits, as defined for regulatory reporting purposes, were $3.3 billion and $3.0 billion at December 31, 2014 and December 31, 2013, respectively, and represented 25% of total deposits at both December 31, 2014 and 2013. Traditional brokered time deposits were $564.1 million and $408.4 million at December 31, 2014 and December 31, 2013, respectively, and represented 4% and 3% of total deposits at December 31, 2014 and 2013, respectively. Our asset/liability management policy currently limits our use of (1) total brokered deposits (as defined for regulatory reporting purposes) to levels no more that 40% of total deposits, and (2) traditional brokered time deposits to levels no more than 25% of total deposits.

The regulatory definition of brokered deposits is very broad and generally includes any non-proprietary funds deposited, or referred for deposit, by a third party. In connection with our liquidity risk management program, we consider characteristics other than regulatory classification when assessing the stability and overall value of deposits to the Bank. Those other characteristics may include pricing, duration, and relationship with the depositor. These deposits are generally sourced by our commercial banking relationship managers and we have a loan relationship with some of those depositors.
At December 31, 2014, approximately 51% of our total brokered deposits were from cash sweep programs, which have historically been a stable source of liquidity for us. Cash sweep program deposits come from the Bank’s relationships with securities broker dealers (“BDs”). From time to time, the BDs’ clients may have cash in their accounts with the BDs pending re-investment in other securities or for liquidity needs. Pursuant to the cash sweep programs, the BDs allow their clients to elect to sweep idle cash into an omnibus bank deposit account established by the BD as agent or custodian for the benefit of its clients. Unlike traditional brokered time deposits, the cash sweep program deposits are generally maintained in money market accounts and may be eligible for FDIC pass-through insurance. The cash sweep program deposits are subject to contracts between the Bank and the BDs that establish terms of the deposits such as price and duration. These deposits have historically been a stable source of liquidity and totaled $1.7 billion, $1.3 billion and $1.2 billion at December 31, 2014, December 31, 2013 and December 31, 2012, respectively. Approximately 51% of the cash sweep program deposit balances at December 31, 2014 is from BDs who have had a deposit relationship with the Bank for more than 4 years.
The following table provides the composition of brokered deposits for the periods presented.

Table 24
Brokered Deposit Composition
(Dollars in thousands)

 
December 31,
 
2014
 
2013
 
2012
Noninterest-bearing demand deposits
$
104,222

 
$
86,585

 
$
406,895

Interest-bearing demand deposits
615,959

 
363,836

 
25,537

Money market deposits
1,438,618

 
1,287,300

 
1,306,227

Time deposits:
 
 
 
 
 
Traditional
564,116

 
408,365

 
382,833

CDARS (1)
521,995

 
711,412

 
610,622

Other
82,714

 
115,565

 
146,323

Total time deposits
1,168,825

 
1,235,342

 
1,139,778

Total brokered deposits
$
3,327,624

 
$
2,973,063

 
$
2,878,437

Brokered deposits as a % of total deposits
25
%
 
25
%
 
24
%
Note: Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
(1) 
The CDARS® deposit program is a deposit services arrangement that effectively achieves FDIC deposit insurance for jumbo deposit relationships.


75

The following table presents our time deposits as of December 31, 2014, with scheduled maturity dates during the period specified.

Table 25
Scheduled Maturities of Time Deposits (1) 
(Amounts in thousands)
 
 
Total
Year ending December 31,
 
2015:
 
First quarter
$
515,381

Second quarter
454,590

Third quarter
538,159

Fourth quarter
314,753

2016
303,327

2017
158,125

2018
119,923

2019
90,394

2020 and thereafter
276

Total
$
2,494,928

(1)    Excludes time deposits held-for-sale of $50.4 million at December 31, 2014.

The following table presents our time deposits of $100,000 or more as of December 31, 2014, which are expected to mature during the period specified.

Table 26
Maturities of Time Deposits of $100,000 or More (1) 
(Amounts in thousands)
 
 
December 31,
2014
Maturing within 3 months
$
466,612

After 3 but within 6 months
398,345

After 6 but within 12 months
748,917

After 12 months
584,155

Total
$
2,198,029

(1)    Excludes time deposits held-for-sale of $32.2 million at December 31, 2014.

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

Deposits held-for-sale

In fourth quarter 2014, we entered into an agreement to sell our banking office in Norcross, Georgia. The transaction included the sale of certain deposits totaling $122.2 million at December 31, 2014 which were classified as held-for-sale on the Consolidated Statements of Condition. On January 20, 2015, we completed the transaction and at the time of sale, deposits sold totaled $106.9 million. The sale did not impact clients associated with our commercial middle market business development office in downtown Atlanta.


76

Short-term Borrowings and Long-term Debt

The following table provides a comparison of short-term borrowings by category for the periods presented.

Table 27
Short-term Borrowings
(Dollars in thousands)
 
 
2014
 
 
2013
 
 
2012
 
Amount
 
Rate (%)
 
 
Amount
 
Rate (%)
 
 
Amount
 
Rate (%)
At year end:
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
$
428,000

 
0.13
 
 
$
2,000

 
3.37
 
 
$
5,000

 
4.96
 
Average for the year:
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
$
280

 
0.10
 
 
$
2,170

 
0.11
 
 
$
4,006

 
0.36
Federal funds purchased
—

 
—
 
 
—

 
 
 
 
18

 
0.30
FHLB advances
38,233

 
0.37
 
 
89,683

 
0.27
 
 
138,696

 
0.31
Total average short-term borrowings
$
38,513

 
0.36
 
 
$
91,853

 
0.27
 
 
$
142,720

 
0.31
 
Maximum month-end balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
$
—

 
 
 
 
$
—

 
 
 
 
$
—

 
 
FHLB advances
428,000

 
 
 
 
380,000

 
 
 
 
530,000

 
 
Credit facility and other borrowings
7

 
 
 
 
—

 
 
 
 
—

 
 

Short-term borrowings at December 31, 2014 totaled $428.0 million, up $426.0 million from the $2.0 million at December 31, 2013. Short-term borrowings represent borrowings that mature in one year or less and consisted solely of FHLB advances at December 31, 2014 and December 31, 2013. During 2014 average short-term borrowings declined $53.3 million from 2013 and $104.2 million from 2012 as we reduced our reliance on FHLB advances as a source to satisfy our short-term funding needs. We may use FHLB advances to meet our funding needs, although we may choose to use brokered time deposits as an alternative depending on cost and certain other factors.

Also included in short-term and secured borrowings on the Consolidated Statements of Financial Condition are amounts related to certain loan participation agreements on loans we originated that were classified as secured borrowings as they did not qualify for sale accounting treatment. As of December 31, 2014 and December 31, 2013, these loan participation agreements totaled $4.4 million and $6.4 million, respectively. A corresponding amount was recorded within loans on the Consolidated Statements of Financial Condition.

Long-term debt, which is comprised of junior subordinated debentures, subordinated debt, and the long-term portion of FHLB advances, totaled $344.8 million at December 31, 2014, declining $283.0 million from $627.8 million at December 31, 2013. During 2014, $253.0 million of FHLB advances were reclassified to short-term as the maturity dates approached one year or less and on October 8, 2014, we redeemed $75.0 million of the $143.8 million outstanding 10% Debentures. We will continue to evaluate market conditions and other factors in making a redemption determination on the remaining $68.8 million of the 10% Debentures. Any such redemption would require regulatory approval. Also during 2014, we entered into three long-term FHLB advances totaling $45.0 million with a weighted average interest rate of 3.7%, $30.0 million of which is due in September 2019 and $15.0 million of which is due in December 2019. These advances provide for a one-time option, three years from the date of issuance to increase the amount outstanding up to $150.0 million each at the same fixed rate as the original advance. The earliest scheduled maturity of long-term debt is $2.0 million of FHLB advances due in March 2019.

In addition to on-balance sheet funding and other liquid assets such as cash and investment securities, we maintain access to various external sources of funding, which assist in the prudent management of funding costs, interest rate risk, and anticipated funding needs or other considerations. Some sources of funding are accessible same-day while others require advance notice. Funds that are immediately accessible include Federal Fund counterparty lines, which are uncommitted lines of credit from other financial institutions, and the borrowing term is typically overnight. Availability of Federal Fund lines fluctuates based on market conditions and counterparty relationship strength. Unused overnight Fed Funds borrowings available totaled $630.5 million and $520.0 million, respectively, at December 31, 2014 and December 31, 2013, respectively.

77


We had borrowing capacity of $735.9 million with the FHLB Chicago at December 31, 2014, of which $265.5 million was available, subject to the additional investment in FHLB Chicago stock required. The borrowing capacity is subject to change based on the availability of acceptable collateral to pledge (such as loans and securities) and the level of our investment in FHLB Chicago stock. This borrowing source may be utilized by the Bank for short-term funding needs, including overnight advances, as well as long-term funding needs.

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

The discount window at the FRB is an additional source of overnight funding. We maintain access to the discount window by pledging loans as collateral to the FRB. Funding availability is primarily dictated by the amount of loans pledged, but also impacted by the margin applied to the loans by the FRB. The amount of loans pledged to the FRB can fluctuate due to the availability of loans eligible under the FRB’s criteria which include stipulations of documentation requirements, credit quality, payment status and other criteria. We can also pledge securities to the FRB supplement discount window capacity. At December 31, 2014, we had $403.8 million in borrowing capacity through the FRB discount window’s primary credit program compared to $621.9 million at December 31, 2013. We had no borrowings outstanding as of December 31, 2014.

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.


78

The following table presents our significant fixed and determinable contractual obligations and significant commitments as of December 31, 2014. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

Table 28
Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet Items
(Amounts in thousands)
 
 
 
 
Payments Due In (2)
 
 
 
Financial Statement Note Reference (1)
 
Less Than
One Year
 
One to
Three Years
 
Three to    
Five
Years
 
Over Five    
Years
 
Total
Deposits without a stated maturity
9
 
$
10,595,040

 
$
—

 
$
—

 
$
—

 
$
10,595,040

Time deposits (3)
9
 
1,822,883

 
461,452

 
210,317

 
276

 
2,494,928

Short-term and secured borrowings
10
 
432,385

 
—

 
—

 
—

 
432,385

Long-term debt
11
 
—

 
—

 
50,000

 
294,788

 
344,788

Operating leases
7
 
12,794

 
22,302

 
20,606

 
32,942

 
88,644

Purchase obligations (4)
—
 
52,923

 
21,487

 
839

 
—

 
75,249

Commitments to extend credit:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines
19
 
 
 
 
 
 
 
 
 
129,943

All other commitments
19
 
 
 
 
 
 
 
 
 
5,769,015

Letters of credit:
 
 
 
 
 
 
 
 
 
 
 
Standby
19
 
 
 
 
 
 
 
 
 
372,342

Commercial
19
 
 
 
 
 
 
 
 
 
5,224

(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 $1.4 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.

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, 2014 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, sponsorships, software license and telecommunications. 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, 2014.

Our commitments to fund community investments totaled $21.4 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, 2014, we had unrecognized tax benefits (exclusive of net interest expense accruals) that would favorably impact the effective tax rate by $212,000 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 15 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K for additional information and disclosure related to uncertain tax positions.

79


CAPITAL

Equity totaled $1.5 billion at December 31, 2014, increasing by $179.8 million compared to $1.3 billion at December 31, 2013, and is primarily due to net income for the year totaling $153.1 million, along with a $11.1 million increase in accumulated other comprehensive income, net of tax, which is mainly associated with an increase in market values on our available-for-sale investment portfolio.

Conversion of Nonvoting Common Stock

Holders of our nonvoting common stock converted 1.58 million shares and 1.95 million shares in 2014 and 2013, respectively, into an equal number of newly-issued shares of our voting common stock on a one-for-one basis. The conversion was done in accordance with the terms of the nonvoting common stock and in connection with the holders' sale of such newly-issued voting common stock. At December 31, 2014, there were no shares of nonvoting common stock outstanding.

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

We currently do not have a stock repurchase program in place; however, we have repurchased shares in connection with the administration of our employee benefit plans. Under the terms of these plans, we accept shares of common stock from plan participants if they elect to surrender previously-owned shares upon exercise of options to cover the exercise price or, in the case of both restricted shares of common stock or stock options, the withholding of shares to satisfy tax withholding obligations associated with the vesting of restricted shares or exercise of stock options. During 2014, we repurchased 181,500 shares with an average value of $29.37 per share.

We reissue 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. We held 2,000 shares of voting common stock as treasury stock at December 31, 2014 and 274,000 shares at December 31, 2013. The reduction in treasury shares is primarily attributable to the annual granting of restricted stock awards in February 2014 as part of our annual incentive and long-term incentive programs as well as for stock option exercises during the year.

Dividends

We declared dividends of $0.04 per common share during 2014, unchanged from 2013. Based on the closing stock price at December 31, 2014 of $33.40, the annualized dividend yield on our common stock was 0.12%. The dividend payout ratio, which represents the percentage of common dividends declared to stockholders to basic earnings per share, was 2.0% for 2014 compared to 2.5% for 2013. While we have no current plans to raise dividends on our common stock, our Board of Directors periodically evaluates our dividend payout ratio, taking into consideration internal capital guidelines, and our strategic objectives and business plans.

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

Capital Management

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

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


80

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

Table 29
Capital Measurements
(Dollars in thousands)
 
Actual
 
FRB Guidelines
For Minimum
Regulatory Capital
 
Regulatory Minimum
For "Well-Capitalized"
under FDICIA
 
December 31,
 
 
 
 
 
 
 
 
 
2014
 
2013
 
Ratio
 
Excess Over
Regulatory Minimum at 12/31/14
 
Ratio
 
Excess Over Well
Capitalized under
FDICIA at 12/31/14
Regulatory capital ratios:
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
12.51
%
 
13.30
%
 
8.00
%
 
$
658,130

 
n/a

 
n/a

The PrivateBank
11.95

 
12.69

 
n/a

 
n/a

 
10.00
%
 
$
284,370

Tier 1 risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
10.49

 
11.08

 
4.00
%
 
946,873

 
n/a

 
n/a

The PrivateBank
10.79

 
11.44

 
n/a

 
n/a

 
6.00
%
 
696,953

Tier 1 leverage:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
9.96

 
10.37

 
4.00
%
 
915,583

 
n/a

 
n/a

The PrivateBank
10.24

 
10.70

 
n/a

 
n/a

 
5.00
%
 
803,495

Other capital ratios (consolidated) (1):
 
 
 
 
 
 
 
 
 
 
 
Tier 1 common equity to risk-weighted assets (2)
9.33

 
9.19

 
 
 
 
 
 
 
 
Tangible common equity to tangible assets
8.91

 
8.57

 
 
 
 
 
 
 
 
 
(1) 
Ratios are not subject to formal FRB regulatory guidance and are non-U.S. GAAP financial measure. Refer to Table 30, "Non-U.S. GAAP Financial Measures" for a reconciliation to U.S. GAAP presentation.
(2) 
For purposes of our presentation, we calculate this ratio in accordance with the applicable regulations of the Board of Governors of the Federal Reserve System and do not give effect to the final Basel III capital rules that are effective January 1, 2015. See "Supervision and Regulation."
n/a
Not applicable

As of December 31, 2014, all of our $169.8 million of outstanding junior subordinated debentures held by trusts that issued trust preferred securities, which as a percentage of Tier 1 capital was 11%, are included in Tier 1 capital. The Tier 1 qualifying amount is limited to 25% of Tier 1 capital as defined under FRB regulations. Under the final regulatory capital rules issued in 2013, as discussed in Item 1, under the section captioned "New Regulatory Capital Rules" within the "Supervision and Regulation" section of this Form 10-K, the Tier 1 capital treatment of our trust preferred securities will be grandfathered, subject to the 25% limitation of Tier 1 capital. In the event we make certain acquisitions, the Tier 1 capital treatment for these instruments will be subject to the phase-out schedule for bank holding companies with greater than $15 billion in total assets. At December 31, 2014, our capital ratios reflects the impact on Tier 1 and total capital of the $75.0 million partial redemption of the $143.8 million outstanding 10% Debentures that occurred early in the fourth quarter of 2014. All of our outstanding trust preferred securities are callable by us and we will continue to evaluate market conditions and other factors in making a redemption determination on the remaining outstanding instruments. Any such redemption would require regulatory approval.

For a full description of our Debentures and subordinated debt, refer to Notes 11 and 12 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, 2014 and 2013 for the Company and the Bank, refer to Note 17 of "Notes to Consolidated Financial Statements" in Item 8 of this Form 10-K.


81

Capital Rules

In July 2013, U.S. banking regulators issued final rules establishing a new comprehensive capital framework for U.S. banking organizations. The rules are discussed in Item 1, under "Recent Developments: Capital Requirements" within the "Supervision and Regulation" section of this Form 10-K.

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, Tier 1 common equity to risk-weighted assets, tangible common equity to risk-weighted assets, tangible common equity to tangible assets, and tangible book value. We believe that presenting these non-U.S. GAAP financial measures will provide information useful to investors in understanding our underlying operational performance, our business, and performance trends and facilitates comparisons with the performance of others in the banking industry.

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

In addition to capital ratios defined by banking regulators, we also consider various measures when evaluating capital utilization and adequacy, including return on average tangible common equity, Tier 1 common equity to risk-weighted assets, tangible common equity to risk-weighted assets, tangible common equity to tangible assets, and tangible book value. These calculations are intended to complement the capital ratios defined by banking regulators for both absolute and comparative purposes. All of these measures exclude the ending balances of goodwill and other intangibles while certain of these ratios exclude preferred capital components. Because U.S. GAAP does not include capital ratio measures, we believe there are no comparable U.S. GAAP financial measures to these ratios. We believe these non-U.S. GAAP financial measures are relevant because they provide information that is helpful in assessing the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of our capitalization to other similar companies. However, because there are no standardized definitions for these ratios, our calculations may not be comparable with other companies, and this may affect the usefulness of these measures to investors. The Tier 1 common equity to risk-weighted assets ratio contained herein is calculated without giving effect to the final Basel III capital rules that are effective on January 1, 2015.

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


82

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

Table 30
Non-U.S. GAAP Financial Measures
(Amounts in thousands)
(Unaudited)
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Taxable-equivalent net interest income
 
 
 
 
 
 
 
 
 
U.S. GAAP net interest income
$
454,737

 
$
421,063

 
$
419,933

 
$
407,127

 
$
400,957

Taxable-equivalent adjustment
3,233

 
3,247

 
2,873

 
2,857

 
3,577

Taxable-equivalent net interest income (a)
$
457,970

 
$
424,310

 
$
422,806

 
$
409,984

 
$
404,534

Average Earning Assets (b)
$
14,206,113

 
$
13,129,470

 
$
12,369,945

 
$
11,746,032

 
$
11,978,364

Net Interest Margin (a) / (b)
3.22
%
 
3.23
%
 
3.42
%
 
3.49
%
 
3.38
 %
Net Revenue
 
 
 
 
 
 
 
 
 
Taxable-equivalent net interest income (a)
$
457,970

 
$
424,310

 
$
422,806

 
$
409,984

 
$
404,534

U.S. GAAP non-interest income
117,590

 
113,990

 
111,041

 
98,247

 
93,246

Net revenue (c)
$
575,560

 
$
538,300

 
$
533,847

 
$
508,231

 
$
497,780

Operating Profit
 
 
 
 
 
 
 
 
 
U.S. GAAP income before income taxes
$
248,207

 
$
199,943

 
$
132,417

 
$
70,200

 
$
64

Provision for loan and covered loan losses
12,044

 
31,796

 
71,425

 
132,897

 
194,541

Taxable-equivalent adjustment
3,233

 
3,247

 
2,873

 
2,857

 
3,577

Operating profit
$
263,484

 
$
234,986

 
$
206,715

 
$
205,954

 
$
198,182

Efficiency Ratio
 
 
 
 
 
 
 
 
 
U.S. GAAP non-interest expense (d)
$
312,076

 
$
303,314

 
$
327,132

 
$
302,277

 
$
299,598

Net revenue (c)
$
575,560

 
$
538,300

 
$
533,847

 
$
508,231

 
$
497,780

Efficiency ratio (d) / (c)
54.22
%
 
56.35
%
 
61.28
%
 
59.48
%
 
60.19
 %
Adjusted Net Income
 
 
 
 
 
 
 
 
 
U.S. GAAP net income (loss) available to common stockholders
$
153,079

 
$
122,949

 
$
64,528

 
$
30,680

 
$
(12,090
)
Amortization of intangibles, net of tax
1,823

 
1,889

 
1,626

 
895

 
1,004

Adjusted net income (loss) (e)
$
154,902

 
$
124,838

 
$
66,154

 
$
31,575

 
$
(11,086
)
Average Tangible Common Equity
 
 
 
 
 
 
 
 
 
U.S. GAAP average total equity
$
1,403,532

 
$
1,259,249

 
$
1,316,121

 
$
1,270,746

 
$
1,246,971

Less: average goodwill
94,041

 
94,499

 
94,550

 
94,499

 
94,650

Less: average other intangibles
7,366

 
11,245

 
14,077

 
16,080

 
17,651

Less: average preferred stock
—

 
—

 
195,602

 
239,654

 
238,196

Average tangible common equity (f)
$
1,504,939

 
$
1,153,505

 
$
1,011,892

 
$
920,513

 
$
896,474

Return on average tangible common equity (e) / (f)
11.90
%
 
10.82
%
 
6.54
%
 
3.43
%
 
-1.24
 %


83

Table 30
Non-U.S. GAAP Financial Measures (Continued)

 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Tier 1 Common Capital
 
 
 
 
 
 
 
 
 
U.S. GAAP total equity
$
1,481,679

 
$
1,301,904

 
$
1,207,166

 
$
1,296,752

 
$
1,227,910

Trust preferred securities
169,788

 
244,793

 
244,793

 
244,793

 
244,793

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

 
9,844

 
48,064

 
46,697

 
20,078

Less: disallowed deferred tax assets
—

 
—

 
—

 
—

 
5,377

Less: goodwill
94,041

 
94,041

 
94,521

 
94,571

 
94,621

Less: other intangibles
5,885

 
8,892

 
12,828

 
15,353

 
16,840

Less: disallowed servicing rights
44

 
—

 
—

 
—

 
—

Tier 1 risk-based capital
1,530,580

 
1,433,920

 
1,296,546

 
1,384,924

 
1,335,787

Less: preferred stock
—

 
—

 
—

 
240,403

 
238,903

Less: trust preferred securities
169,788

 
244,793

 
244,793

 
244,793

 
244,793

Less: noncontrolling interests
—

 
—

 
—

 
—

 
33

Tier 1 common capital (e)
$
1,360,792

 
$
1,189,127

 
$
1,051,753

 
$
899,728

 
$
852,058

Tangible Common Equity
 
 
 
 
 
 
 
 
 
U.S. GAAP total equity
$
1,481,679

 
$
1,301,904

 
$
1,207,166

 
$
1,296,752

 
$
1,227,910

Less: goodwill
94,041

 
94,041

 
94,521

 
94,571

 
94,621

Less: other intangibles
5,885

 
8,892

 
12,828

 
15,353

 
16,840

Tangible equity (f)
1,381,753

 
1,198,971

 
$
1,099,817

 
1,186,828

 
1,116,449

Less: preferred stock
—

 
—

 
—

 
240,403

 
238,903

Tangible common equity (g)
$
1,381,753

 
$
1,198,971

 
$
1,099,817

 
$
946,425

 
$
877,546

Tangible Assets
 
 
 
 
 
 
 
 
 
U.S. GAAP total assets
$
15,603,382

 
$
14,085,746

 
$
14,057,515

 
$
12,416,870

 
$
12,465,621

Less: goodwill
94,041

 
94,041

 
94,521

 
94,571

 
94,621

Less: other intangibles
5,885

 
8,892

 
12,828

 
15,353

 
16,840

Tangible assets (h)
$
15,503,456

 
$
13,982,813

 
$
13,950,166

 
$
12,306,946

 
$
12,354,160

Risk-weighted Assets (i)
$
14,592,655

 
$
12,938,576

 
$
12,337,398

 
$
11,191,298

 
$
11,080,051

Period-end Common Shares Outstanding (j)
78,178

 
77,708

 
77,115

 
71,745

 
71,327

Ratios:
 
 
 
 
 
 
 
 
 
Tier 1 common equity to risk-weighted assets (e) / (i)
9.33
%
 
9.19
%
 
8.52
%
 
8.04
%
 
7.69
%
Tangible equity to tangible assets (f) / (h)
8.91
%
 
8.57
%
 
7.88
%
 
9.64
%
 
9.04
%
Tangible equity to risk-weighted assets (f) / (i)
9.47
%
 
9.27
%
 
8.91
%
 
10.60
%
 
10.08
%
Tangible common equity to tangible assets (g) / (h)
8.91
%
 
8.57
%
 
7.88
%
 
7.69
%
 
7.10
%
Tangible book value (g) / (j)
$
17.67

 
$
15.43

 
$
14.26

 
$
13.19

 
$
12.30


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 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.


84

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, 2014, approximately 79% of the total loan portfolio is indexed to LIBOR, with over two-thirds indexed to one month LIBOR, 16% of the total loan portfolio is indexed to the prime rate, and another 1% of the total loan portfolio otherwise adjusts with other reference interest rates. Of the $8.3 billion in loans maturing after one year with a floating interest rate, 15% or $1.3 billion are subject to interest rate floors, of which 93% are in effect at December 31, 2014 and are reflected in the interest sensitivity analysis below. To manage the interest rate risk of our balance sheet, we have the ability to use a combination of financial instruments, including medium-term and short-term financings, variable-rate debt instruments, fixed-rate loans and securities and interest rate swaps.

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

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

Modeling the sensitivity of net interest income to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. These assumptions are periodically reviewed and updated in the context of various internal and external factors including balance sheet changes, product offerings, product mix, external micro- and macro-economic factors, anticipated client behavior and anticipated Company and market pricing behavior. We also analyze deposit segmentation based on size, type and behavioral characteristics. We regularly conduct historical deposit re-pricing and deposit lifespan/retention analyses and adjust our forward-looking assumptions related to client and market behavior. During 2014, based on our analyses and judgments, we modified the core deposit product repricing characteristics and retention periods, as well as average life estimates, used in our interest rate risk modeling which reflects higher interest rate sensitivity of our deposits.

The following table shows the estimated impact of an immediate change in interest rates as of December 31, 2014 based on our current simulation modeling assumptions and as of December 31, 2013, as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2013.

Analysis of Net Interest Income Sensitivity
(Dollars in thousands)
 
 
Immediate Change in Rates
 
-50
 
+50
 
+100
 
+200
 
+300
December 31, 2014:
 
 
 
 
 
 
 
 
 
Dollar change
$
(6,216
)
 
$
16,199

 
$
30,586

 
$
60,158

 
$
88,083

Percent change
-1.4
 %
 
3.6
%
 
6.7
%
 
13.2
%
 
19.4
%
December 31, 2013:
 
 
 
 
 
 
 
 
 
Dollar change
$
(6,961
)
 
$
14,815

 
$
27,594

 
$
57,644

 
$
89,663

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

85


The table above illustrates the estimated impact to our net interest income over a one year period as 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, 2014, net interest income would increase by $30.6 million, or 6.7%, over a twelve-month period, as compared to a net interest income increase of $27.6 million, or 6.9%, if there had been an instantaneous parallel shift of +100 basis points at December 31, 2013. The Company’s overall interest rate asset sensitivity decreased from December 31, 2013, as compared to December 31, 2014, due to several factors. Growth in rate sensitive loans was offset by an increase in the sensitivity of liabilities. The increase in loans was funded primarily by deposits which were more rate sensitive as compared to December 31, 2013, along with an increase in rate sensitive overnight borrowings at the FHLB. Also contributing to the decrease in overall sensitivity was the partial redemption of the 10% Debentures and the hedging program. Based on the modeling, the Company remains in an asset sensitive position and would benefit from a rise in interest rates, despite the decrease in sensitivity over the past 12 months.



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, 2014 and 2013, 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, 2014. 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, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, 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, 2014, 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 March 2, 2015, expressed an unqualified opinion thereon.

/S/ ERNST & YOUNG LLP

Chicago, Illinois
March 2, 2015


86

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands)

 
December 31,
 
2014
 
2013
Assets
 
 
 
Cash and due from banks
$
132,211

 
$
133,518

Federal funds sold and interest-bearing deposits in banks
292,341

 
306,544

Loans held-for-sale
115,161

 
26,816

Securities available-for-sale, at fair value (pledged as collateral to creditors: $86.5 million - 2014; $108.1 million - 2013)
1,645,344

 
1,602,476

Securities held-to-maturity, at amortized cost (fair value: $1.1 billion - 2014; $896.9 million - 2013)
1,129,285

 
921,436

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

 
30,005

Loans – excluding covered assets, net of unearned fees
11,892,219

 
10,644,021

Allowance for loan losses
(152,498
)
 
(143,109
)
Loans, net of allowance for loan losses and unearned fees
11,739,721

 
10,500,912

Covered assets
34,132

 
112,746

Allowance for covered loan losses
(5,191
)
 
(16,511
)
Covered assets, net of allowance for covered loan losses
28,941

 
96,235

Other real estate owned, excluding covered assets
17,416

 
28,548

Premises, furniture, and equipment, net
39,143

 
39,704

Accrued interest receivable
40,531

 
37,004

Investment in bank owned life insurance
55,207

 
53,865

Goodwill
94,041

 
94,041

Other intangible assets
5,885

 
8,892

Derivative assets
43,062

 
48,422

Other assets
196,427

 
157,328

Total assets
$
15,603,382

 
$
14,085,746

Liabilities
 
 
 
Demand deposits:
 
 
 
Noninterest-bearing
$
3,516,695

 
$
3,172,676

Interest-bearing
1,907,320

 
1,470,856

Savings deposits and money market accounts
5,171,025

 
4,799,561

Time deposits
2,494,928

 
2,570,548

Total deposits
13,089,968

 
12,013,641

Deposits held-for-sale
122,216

 
—

Short-term and secured borrowings
432,385

 
8,400

Long-term debt
344,788

 
627,793

Accrued interest payable
6,948

 
6,326

Derivative liabilities
26,767

 
48,890

Other liabilities
98,631

 
78,792

Total liabilities
14,121,703

 
12,783,842

Equity
 
 
 
Common stock:
 
 
 
Voting
77,211

 
75,240

Nonvoting
—

 
1,585

Treasury stock
(53
)
 
(6,415
)
Additional paid-in capital
1,034,048

 
1,022,023

Retained earnings
349,556

 
199,627

Accumulated other comprehensive income, net of tax
20,917

 
9,844

Total equity
1,481,679

 
1,301,904

Total liabilities and equity
$
15,603,382

 
$
14,085,746

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

87

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

 
None

 
None

 
None

Liquidation value
n/a

 
n/a

 
n/a

 
n/a

Stated value
$
1.00

 
$
1.00

 
$
1.00

 
$
1.00

Share Balances
 
 
 
 
 
 
 
Shares authorized
174,000

 
5,000

 
174,000

 
5,000

Shares issued
78,180

 
—

 
76,397

 
1,585

Shares outstanding
78,178

 
—

 
76,123

 
1,585

Treasury shares
2

 
—

 
274

 
—

See accompanying notes to consolidated financial statements.

88

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
Interest Income
 
 
 
 
 
Loans, including fees
$
463,755

 
$
433,829

 
$
423,211

Federal funds sold and interest-bearing deposits in banks
770

 
652

 
965

Securities:
 
 
 
 
 
Taxable
53,500

 
51,310

 
56,826

Exempt from Federal income taxes
6,173

 
6,200

 
5,487

Other interest income
189

 
247

 
547

Total interest income
524,387

 
492,238

 
487,036

Interest Expense
 
 
 
 
 
Interest-bearing demand deposits
3,728

 
4,202

 
3,378

Savings deposits and money market accounts
16,857

 
16,350

 
17,604

Time deposits
21,366

 
20,161

 
21,832

Short-term and secured borrowings
638

 
850

 
443

Long-term debt
27,061

 
29,612

 
23,846

Total interest expense
69,650

 
71,175

 
67,103

Net interest income
454,737

 
421,063

 
419,933

Provision for loan and covered loan losses
12,044

 
31,796

 
71,425

Net interest income after provision for loan and covered loan losses
442,693

 
389,267

 
348,508

Non-interest Income
 
 
 
 
 
Asset management
17,268

 
18,377

 
17,017

Mortgage banking
10,245

 
12,172

 
13,460

Capital markets products
18,047

 
20,728

 
25,958

Treasury management
27,472

 
24,668

 
21,510

Loan, letter of credit and commitment fees
19,311

 
17,217

 
18,173

Syndication fees
19,514

 
13,447

 
9,107

Deposit service charges and fees and other income
5,203

 
6,207

 
6,021

Net securities gains (losses)
530

 
1,174

 
(205
)
Total non-interest income
117,590

 
113,990

 
111,041

Non-interest Expense
 
 
 
 
 
Salaries and employee benefits
182,192

 
166,929

 
174,948

Net occupancy and equipment expense
31,258

 
30,027

 
30,571

Technology and related costs
13,281

 
13,726

 
13,250

Marketing
13,441

 
12,590

 
10,311

Professional services
11,761

 
8,539

 
8,353

Outsourced servicing costs
6,864

 
6,817

 
7,419

Net foreclosed property expenses
8,681

 
20,194

 
38,296

Postage, telephone, and delivery
3,400

 
3,521

 
3,497

Insurance
12,451

 
10,867

 
15,186

Loan and collection expense
6,765

 
8,753

 
11,631

Other expenses
21,982

 
21,351

 
13,670

Total non-interest expense
312,076

 
303,314

 
327,132

Income before income taxes
248,207

 
199,943

 
132,417

Income tax provision
95,128

 
76,994

 
54,521

Net income
153,079

 
122,949

 
77,896

Preferred stock dividends and discount accretion
—

 
—

 
13,368

Net income available to common stockholders
$
153,079

 
$
122,949

 
$
64,528

Per Common Share Data
 
 
 
 
 
Basic earnings per share
$
1.96

 
$
1.58

 
$
0.88

Diluted earnings per share
$
1.94

 
$
1.57

 
$
0.88

Cash dividends declared
$
0.04

 
$
0.04

 
$
0.04

Weighted-average common shares outstanding
77,007

 
76,398

 
71,951

Weighted-average diluted common shares outstanding
77,822

 
76,645

 
72,174

See accompanying notes to consolidated financial statements.

89

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
Net income
$
153,079

 
$
122,949

 
$
77,896

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

 
(46,690
)
 
(4,185
)
Reclassification of net gains included in net income
(530
)
 
(1,174
)
 
(315
)
Income tax (expense) benefit
(4,226
)
 
18,605

 
1,579

Net unrealized gains (losses) on available-for-sale securities
6,488

 
(29,259
)
 
(2,921
)
Cash flow hedges:
 
 
 
 
 
Net unrealized gains (losses)
16,777

 
(8,729
)
 
9,945

Reclassification of net gains included in net income
(9,262
)
 
(5,984
)
 
(2,928
)
Income tax (expense) benefit
(2,930
)
 
5,752

 
(2,729
)
Net unrealized gains (losses) on cash flow hedges
4,585

 
(8,961
)
 
4,288

Other comprehensive income (loss)
11,073

 
(38,220
)
 
1,367

Comprehensive income
$
164,152

 
$
84,729

 
$
79,263

See accompanying notes to consolidated financial statements.


90

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

 
Common
Shares
Out-
standing
 
 
Preferred
Stock
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumu-
lated
Other
Compre-
hensive
Income
 
Total
Balance at January 1, 2012
71,745

 
 
$
240,403

 
$
71,483

 
$
(21,454
)
 
$
941,404

 
$
18,219

 
$
46,697

 
$
1,296,752

Comprehensive income (1)
—

 
 
—

 
—

 
—

 
—

 
77,896

 
1,367

 
79,263

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock ($0.04 per share)
—

 
 
—

 
—

 
—

 
—

 
(2,948
)
 
—

 
(2,948
)
Preferred stock
—

 
 
—

 
—

 
—

 
—

 
(9,956
)
 
—

 
(9,956
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New issuance, net of costs
4,761

 
 
—

 
4,761

 
—

 
65,896

 
—

 
—

 
70,657

Nonvested (restricted) stock grants
709

 
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Exercise of stock options
54

 
 
—

 
54

 
—

 
257

 
—

 
—

 
311

Restricted stock activity
(43)

 
 
—

 
650

 
—

 
(682
)
 
—

 
—

 
(32
)
Deferred compensation plan
17

 
 
—

 
17

 
—

 
183

 
—

 
—

 
200

Redemption of preferred stock
—

 
 
(243,815
)
 
—

 
—

 
—

 
—

 
—

 
(243,815
)
Repurchase of common stock warrant
—

 
 
—

 
—

 
—

 
(1,225
)
 
—

 
—

 
(1,225
)
Accretion of preferred stock discount
—

 
 
3,412

 
—

 
—

 
—

 
(3,412
)
 
—

 
—

Stock repurchased in connection with benefit plans
(178)

 
 
—

 
—

 
(2,696
)
 
—

 
—

 
—

 
(2,696
)
Share-based compensation expense
50

 
 
—

 
50

 
—

 
20,605

 
—

 
—

 
20,655

Balance at December 31, 2012
77,115

 
 
$
—

 
$
77,015

 
$
(24,150
)
 
$
1,026,438

 
$
79,799

 
$
48,064

 
$
1,207,166

Comprehensive income (1)
—

 
 
—

 
—

 
—

 
—

 
122,949

 
(38,220
)
 
84,729

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock ($0.04 per share)
—

 
 
—

 
—

 
—

 
—

 
(3,121
)
 
—

 
(3,121
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonvested (restricted) stock grants
597

 
 
—

 
(597
)
 
15,166

 
(14,569
)
 
—

 
—

 
—

Exercise of stock options
197

 
 
—

 
5

 
4,536

 
(1,695
)
 
—

 
—

 
2,846

Restricted stock activity
(77)

 
 
—

 
401

 
218

 
(790
)
 
—

 
—

 
(171
)
Deferred compensation plan
13

 
 
—

 
1

 
337

 
(37
)
 
—

 
—

 
301

Stock repurchased in connection with benefit plans
(138)

 
 
—

 
—

 
(2,522
)
 
—

 
—

 
—

 
(2,522
)
Share-based compensation expense
—

 
 
—

 
—

 
—

 
12,676

 
—

 
—

 
12,676

Balance at December 31, 2013
77,707

 
 
$
—

 
$
76,825

 
$
(6,415
)
 
$
1,022,023

 
$
199,627

 
$
9,844

 
$
1,301,904

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

91

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY – (Continued)
(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 December 31, 2013
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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock ($0.04 per 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

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

92

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 
Year Ended December 31,
 
2014
 
2013
 
2012
Operating Activities
 
 
 
 
 
Net income
$
153,079

 
$
122,949

 
$
77,896

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Provision for loan and covered loan losses
12,044

 
31,796

 
71,425

Provision for unfunded commitments
3,152

 
1,863

 
66

Depreciation of premises, furniture, and equipment
8,693

 
8,461

 
9,293

Net amortization of premium on securities
14,899

 
16,435

 
15,861

Net (gains) losses on sale of securities
(530
)
 
(1,174
)
 
205

Valuation adjustments on other real estate owned
6,479

 
19,458

 
25,248

Net losses (gains) on sale of other real estate owned
189

 
(1,735
)
 
5,996

Net amortization of discount on covered assets
136

 
1,483

 
1,828

Bank owned life insurance income
(1,342
)
 
(1,352
)
 
(1,547
)
Net increase (decrease) in deferred fees and unamortized discounts and premiums on loans
9,954

 
(2,593
)
 
408

Share-based compensation expense
15,568

 
12,676

 
20,655

Excess tax benefit from exercise of stock options and vesting of restricted shares
(3,588
)
 
(723
)
 
(118
)
Provision for deferred income tax (benefit) expense
(8,184
)
 
14,646

 
15,828

Amortization of other intangibles
3,007

 
3,121

 
2,684

Originations and purchases of loans held-for-sale
(518,147
)
 
(514,244
)
 
(587,064
)
Proceeds from sales of loans held-for-sale
438,254

 
548,126

 
581,143

Net gains from sales of loans held-for-sale
(8,199
)
 
(11,237
)
 
(11,848
)
Net (increase) decrease in derivative assets and liabilities
(16,763
)
 
6,453

 
160

Net (increase) decrease in accrued interest receivable
(3,527
)
 
(2,172
)
 
900

Net increase (decrease) in accrued interest payable
622

 
(815
)
 
1,574

Net increase in other assets
(27,830
)
 
(16,491
)
 
(17,161
)
Net increase (decrease) in other liabilities
16,662

 
5,422

 
(11,504
)
Net cash provided by operating activities
94,628

 
240,353

 
201,928

Investing Activities
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
Proceeds from maturities, prepayments, and calls
232,967

 
316,803

 
424,917

Proceeds from sales
74,690

 
114,740

 
20,905

Purchases
(349,320
)
 
(641,016
)
 
(129,871
)
Held-to-maturity securities:
 
 
 
 
 
Proceeds from maturities, prepayments, and calls
120,844

 
123,913

 
82,621

Purchases
(333,553
)
 
(186,589
)
 
(459,897
)
Net redemption (purchase) of FHLB stock
1,339

 
13,382

 
(2,692
)
Net increase in loans
(1,270,685
)
 
(568,557
)
 
(1,260,301
)
Net decrease in covered assets
67,564

 
71,855

 
108,286

Proceeds from sale of other real estate owned
13,936

 
52,919

 
42,162

Net purchases of premises, furniture, and equipment
(8,174
)
 
(8,657
)
 
(8,564
)
Net cash used in investing activities
(1,450,392
)
 
(711,207
)
 
(1,182,434
)
Financing Activities
 
 
 
 
 
Net increase (decrease) in deposit accounts, including deposits held-for-sale
1,198,543

 
(159,993
)
 
1,780,780

Net (decrease) increase in short-term and secured borrowings, excluding FHLB advances
(2,015
)
 
6,400

 
—

Net increase (decrease) in FHLB advances
218,000

 
245,000

 
(156,000
)
Repayment of long-term debt
(75,005
)
 
(120,000
)
 
—

Proceeds from the issuance of long-term debt
—

 
—

 
125,000

Payments for the redemption of preferred stock
—

 
—

 
(243,815
)
Payments for the redemption of common stock warrant
—

 
—

 
(1,225
)
Net proceeds from the issuance of common stock
—

 
—

 
70,657

Stock repurchased in connection with benefit plans
(5,330
)
 
(2,522
)
 
(2,696
)
Cash dividends paid
(3,125
)
 
(3,119
)
 
(13,082
)
Proceeds from exercise of stock options and issuance of common stock under benefit plans
5,598

 
2,976

 
479

Excess tax benefit from exercise of stock options and vesting of restricted shares
3,588

 
723

 
118

Net cash provided by (used in) financing activities
1,340,254

 
(30,535
)
 
1,560,216

Net (decrease) increase in cash and cash equivalents
(15,510
)
 
(501,389
)
 
579,710

Cash and cash equivalents at beginning of year
440,062

 
941,451

 
361,741

Cash and cash equivalents at end of year
$
424,552

 
$
440,062

 
$
941,451

See accompanying notes to consolidated financial statements.

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PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Amounts in thousands)
 
Year Ended December 31,
 
2014
 
2013
 
2012
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
 
Cash paid for interest
$
69,028

 
$
71,990

 
$
65,529

Cash paid for income taxes
99,820

 
47,183

 
58,328

Non-cash transfers:
 
 
 
 
 
Loans to loans held-for-sale
182,831

 
27,243

 
24,108

Loans to other real estate
8,753

 
17,310

 
29,557

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.


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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. The majority of the Bank’s business is conducted in the greater Chicago market.

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, 2014 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.

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. On a quarterly basis, we assess whether there have been any events or circumstances to indicate that a security for which there is

95

an unrealized loss is impaired on an other-than-temporary ("OTTI") basis. This determination requires significant judgment. OTTI is considered to have occurred (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 expect 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. All of the OTTI is recognized in earnings for securities we expect to sell.

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 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 noninterest 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 on the specific identification method. Residential mortgage loans sold in the secondary market are sold without retaining servicing rights.

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. 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.

Impaired Loans – Impaired loans consist of nonaccrual loans (which include nonaccrual troubled debt restructurings ("TDRs")) and loans classified as accruing TDRs. A loan is considered impaired when, based on current information and events, management believes that either 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 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.

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 in the period in which the determination has been made, to reflect its current economic value.

At the time a collateral-dependent loan is initially determined to be impaired, we review the existing collateral appraisal. If the most recent appraisal is greater than one-year old, a new appraisal of the underlying collateral is obtained. The majority of collateral-dependent impaired loans are secured by real estate for which we generally obtain "as is" appraisal values in order 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

96

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. With a de minimis number of exceptions, all appraisals and internal reviews are current under this methodology at December 31, 2014.

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 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 when the financial position of the borrower and other relevant factors indicate there is no longer doubt as to such collectibility.

Restructured Loans – Loans may be modified in the normal course of business for competitive reasons or to strengthen the Company’s position. Loan modifications and restructurings may also occur when the borrower experiences financial difficulty and needs temporary or permanent relief from the original contractual terms of the loan. These modifications are structured on a loan-by-loan basis, and depending on the circumstances, may include extensions of maturity dates, rate reductions, forgiveness of principal, or other concessions. 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 considered 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 security or guarantees, and the potential costs related to a repossession or foreclosure and the subsequent sale of the collateral.

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. 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.

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. 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 reserves for probable losses that have been identified relating to specific borrowing relationships that are individually evaluated for impairment ("the specific component"), as well as probable losses inherent in our loan portfolio that are not specifically identified ("the general allocated component"), which is determined using a methodology that is a function of quantitative and qualitative factors applied to segments of our loan portfolio.

The specific component relates to impaired loans. 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 component of the allowance for loan losses.

To determine the general allocated component of the allowance for loan losses, we segregate loans by vintage ("transformational" and "legacy") and product type (e.g., commercial, commercial real estate) because of observable similarities in the historical performance experience of loans underwritten by these business units. In general, loans originated by the business units that existed prior to the strategic changes of the Company in 2007 are considered "legacy" loans. Loans originated by a business unit that was established in connection with or following the strategic business transformation plan are considered "transformational" loans. Renewals or restructurings of legacy loans may continue to be evaluated as legacy loans depending on the structure or defining characteristics of the new transaction. The Company has implemented a line of business model that has reorganized the legacy

97

business units so that after 2009, all new loan originations are considered transformational. At the time an accruing loan becomes modified and meets the definition of a TDR, it is considered impaired and is no longer included as part of the general allocated component. However, our general reserve methodology considers the amount and product type of the TDRs removed as one of many credit or portfolio considerations in establishing final reserve requirements.

The methodology produces an estimated range of potential loss exposure for the product types within each vintage. The methodology also considers where a given product type is within the range of potential losses based on an estimate of the loss emergence period. The loss emergence period is an estimate of the length of time for potential losses embedded in the portfolio today to be recognized. Factors that affect the loss emergence period include the macroeconomic landscape, industry factors, and borrower specific performance. In general, the loss emergence period tends to lengthen in times of improving conditions and shortens in time of economic distress. During 2014, we formally measured the loss emergence period by analyzing recent historical loss data and information aggregated at the product level. This analysis showed that the loss emergence period is lengthening for most product categories. We consider the appropriate balance of the general allocated component of the reserve in relation to a variety of internal and external quantitative and qualitative factors to reflect data or timeframes not captured by the basic allowance framework as well as market and economic data and management judgment. In certain instances, these additional factors and judgments may lead management to conclude that the appropriate level of the reserve is outside the range determined through the basic allowance framework.

The product segments we evaluate in the general reserve 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.

Commercial real estate loans comprise loans secured by various types of collateral including 1-4 family non-owner occupied housing units located primarily in our target market areas, multi-family real estate, office buildings, warehouses, retail space, 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 market value of the property taken as collateral, the underlying cash flows 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 tenants at rental rates that provide for 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 more pronounced risk to interest rate movements and the real estate market that these borrowers face while a project is being completed or 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 price declines and resulting increases in loan to value ratios, low sales volume, high unemployment rates, increases in foreclosure rates, and high 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, and vintage; and consideration of current economic trends and portfolio attributes, all of which may be susceptible to significant change. For instance, loss rates in our allowance methodology typically reflect the Company's more recent loss experience, by product, on a trailing twelve month basis. These loss rates consider both cumulative charge-offs and other real estate owned ("OREO") valuation adjustments over the period in the individual product categories that constitute our allowance. Default estimates use a multi-year originating vintage and rating approach. In addition, we compare current model-derived and historic reserve levels to recent charge-off trends and history in considering the appropriate reserve 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

98

for loan losses to a level that, in management’s judgment, is appropriate to absorb probable losses in the loan portfolio as of the balance sheet 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 on the Consolidated Statements of Financial Condition. The reserve is computed using a methodology similar to that used to determine the general allocated component of the allowance for loan losses 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. Net adjustments to the reserve for unfunded commitments are included in other non-interest expense in the Consolidated Statements of Income.

Purchased Loans – Purchased loans acquired through portfolio purchases or in a business combination are accounted for under specialized accounting guidance when the loans have evidence of credit deterioration at the time of acquisition and it is probable that not all contractual payments will be collected ("purchased 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.

U.S. GAAP requires purchased loans not subject to the specialized accounting guidance ("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.

The fair values for purchased 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.

Under the applicable accounting guidance for purchased 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 losses to the extent previously established or a prospective adjustment to the accretable yield. Purchased 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 sharing 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 reflected 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 for loan losses. 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 or expenses incurred in maintaining such properties and are reported in non-interest expense in the Consolidated Statements of Income.

Depreciable Assets – Premises, leasehold improvements, furniture and equipment, and software 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 1-16 years; furniture and equipment, 3-7 years; and software, 3-5 years. Gains on dispositions are included in other income, and losses on dispositions are included in other expense in the Consolidated Statements of Income. Maintenance and repairs are charged to operating expenses

99

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 value, 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.

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 to perform a qualitative assessment of impairment 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 the Company concludes it is more likely than not, the Company would proceed with the existing two-step test, as described above. Otherwise, the Company 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.

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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 on 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 is attributable to a particular risk are considered to be cash flow hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking each hedge transaction at its inception.

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 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 immediately in current earnings during the period of change. For derivatives not designated in a hedge relationship, 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(s) 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.


101

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 (i.e., 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 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 stockholders’ equity or 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

102

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 Investments in Qualified Affordable Housing Projects - On January 1, 2014, we adopted new accounting guidance issued by the Financial Accounting Standards Board ("FASB") related to the accounting for investments in limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. The guidance allows the Company to elect to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Additionally, the guidance requires disclosure of (1) the nature of the Company’s investments in qualified affordable housing projects and (2) the effect of the measurement of those investments and the related tax credits on the Company’s financial position and results of operations. Prior to the adoption of this new guidance, the Company previously accounted for such investments using the effective yield method. As permitted under the new guidance, the Company has elected to continue accounting for its investments in qualified affordable housing projects that existed prior to the date of adoption using the effective yield method. Any new investments in qualified affordable housing projects entered into on or after January 1, 2014 that meet certain conditions will be accounted for using the proportional amortization method. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits allocated to the Company. While the guidance affected our disclosures, adoption of the guidance did not materially impact our financial position or consolidated results of operations. Refer to Note 22 for the required disclosures.

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

Accounting Pronouncements Pending Adoption

Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure - In August 2014, the FASB issued guidance that requires a creditor to derecognize a mortgage loan upon foreclosure and recognize a separate other receivable if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable is measured based on the amount of the loan balance expected to be recovered from the guarantor. The guidance will be effective for the Company’s financial statements beginning January 1, 2015. The adoption of this guidance is not expected to have a material impact on our financial position or consolidated results of operations.

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans - In January 2014, the FASB issued guidance that clarifies when the Company should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The guidance indicates that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or similar legal agreement. Additionally, the guidance requires disclosure of (1) the amount of foreclosed residential real estate property held by the Company and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The guidance will be effective for the Company’s financial statements beginning

103

January 1, 2015. The adoption of this guidance is not expected to have a material impact on our financial position or consolidated results of operations.

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

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

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

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern - In August 2014, the FASB issued guidance that requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern. The guidance requires new disclosures to the extent management concludes there is substantial doubt about an entity’s ability to continue as a going concern. The guidance will be effective for the Company’s annual financial statements dated December 31, 2016, as well as interim periods thereafter. The adoption of this guidance is not expected to have a material impact on our financial position or consolidated results of operations.


104

3. SECURITIES

Securities Portfolio
(Amounts in thousands)
 
 
December 31,
 
2014
 
2013
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Gains
 
Losses
 
Gains
 
Losses
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
269,697

 
$
120

 
$
(1,552
)
 
$
268,265

 
$
145,716

 
$
—

 
$
(3,141
)
 
$
142,575

U.S. Agencies
46,959

 
—

 
(701
)
 
46,258

 
47,409

 
—

 
(1,881
)
 
45,528

Collateralized mortgage obligations
132,633

 
4,334

 
(34
)
 
136,933

 
169,775

 
6,356

 
(15
)
 
176,116

Residential mortgage-backed securities
822,746

 
25,058

 
(1,726
)
 
846,078

 
946,656

 
23,627

 
(7,176
)
 
963,107

State and municipal securities
340,810

 
7,222

 
(722
)
 
347,310

 
271,135

 
6,627

 
(3,112
)
 
274,650

Foreign sovereign debt
500

 
—

 
—

 
500

 
500

 
—

 
—

 
500

Total
$
1,613,345

 
$
36,734

 
$
(4,735
)
 
$
1,645,344

 
$
1,581,191

 
$
36,610

 
$
(15,325
)
 
$
1,602,476

Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
59,960

 
$
—

 
$
(2,017
)
 
$
57,943

 
$
67,335

 
$
—

 
$
(3,263
)
 
$
64,072

Residential mortgage-backed securities
885,235

 
9,410

 
(2,483
)
 
892,162

 
688,410

 
637

 
(15,274
)
 
673,773

Commercial mortgage-backed securities
183,021

 
592

 
(2,176
)
 
181,437

 
164,607

 
6

 
(6,640
)
 
157,973

State and municipal securities
1,069

 
4

 
—

 
1,073

 
1,084

 
6

 
—

 
1,090

Total
$
1,129,285

 
$
10,006

 
$
(6,676
)
 
$
1,132,615

 
$
921,436

 
$
649

 
$
(25,177
)
 
$
896,908


The carrying value of securities pledged to secure public deposits, FHLB advances, trust deposits, Federal Reserve Bank ("FRB") discount window borrowing availability, derivative transactions, standby letters of credit with counterparty banks and for other purposes as permitted or required by law, totaled $353.1 million and $401.4 million at December 31, 2014 and 2013, respectively. Of total pledged securities, securities pledged to creditors under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties totaled $86.5 million and $108.1 million at December 31, 2014 and 2013, respectively.

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


105

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

Securities in Unrealized Loss Position
(Amounts in thousands)

 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
119,233

 
$
(159
)
 
$
123,117

 
$
(1,393
)
 
$
242,350

 
$
(1,552
)
U.S. Agency
—

 
—

 
46,258

 
(701
)
 
46,258

 
(701
)
Collateralized mortgage obligations
4,565

 
(34
)
 
—

 
—

 
4,565

 
(34
)
Residential mortgage-backed securities
—

 
—

 
89,085

 
(1,726
)
 
89,085

 
(1,726
)
State and municipal securities
53,092

 
(249
)
 
32,152

 
(473
)
 
85,244

 
(722
)
Total
$
176,890

 
$
(442
)
 
$
290,612

 
$
(4,293
)
 
$
467,502

 
$
(4,735
)
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
—

 
$
—

 
$
57,943

 
$
(2,017
)
 
$
57,943

 
$
(2,017
)
Residential mortgage-backed securities
45,867

 
(38
)
 
162,564

 
(2,445
)
 
208,431

 
(2,483
)
Commercial mortgage-backed securities
10,021

 
(28
)
 
105,709

 
(2,148
)
 
115,730

 
(2,176
)
Total
$
55,888

 
$
(66
)
 
$
326,216

 
$
(6,610
)
 
$
382,104

 
$
(6,676
)
As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
142,575

 
$
(3,141
)
 
$
—

 
$
—

 
$
142,575

 
$
(3,141
)
U.S. Agency
45,528

 
(1,881
)
 
—

 
—

 
45,528

 
(1,881
)
Collateralized mortgage obligations
3,409

 
(15
)
 
—

 
—

 
3,409

 
(15
)
Residential mortgage-backed securities
276,657

 
(7,176
)
 
—

 
—

 
276,657

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

 
(2,812
)
 
10,325

 
(300
)
 
114,767

 
(3,112
)
Total
$
572,611

 
$
(15,025
)
 
$
10,325

 
$
(300
)
 
$
582,936

 
$
(15,325
)
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
64,072

 
$
(3,263
)
 
$
—

 
$
—

 
$
64,072

 
$
(3,263
)
Residential mortgage-backed securities
556,410

 
(14,908
)
 
3,327

 
(366
)
 
559,737

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

 
(4,674
)
 
25,240

 
(1,966
)
 
148,261

 
(6,640
)
Total
$
743,503

 
$
(22,845
)
 
$
28,567

 
$
(2,332
)
 
$
772,070

 
$
(25,177
)

There were $616.8 million of securities with $10.9 million in an unrealized loss position for greater than 12 months at December 31, 2014. At December 31, 2013, there were $38.9 million of securities with $2.6 million in an unrealized loss position greater than 12 months. The Company does not consider these unrealized losses to be credit-related. These unrealized losses relate to changes in interest rates and market spreads. We do not intend to sell the securities and we do not believe it is more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity. Accordingly, no other-than-temporary impairments have been recorded on these securities during 2014 or 2013.


106

The following table presents the remaining contractual maturity of securities as of December 31, 2014 by amortized cost and fair value.

Remaining Contractual Maturity of Securities
(Amounts in thousands)
 
 
December 31, 2014
 
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
$
5,586

 
$
5,682

 
$
816

 
$
817

One year to five years
460,131

 
461,243

 
253

 
256

Five years to ten years
181,139

 
184,042

 
—

 
—

After ten years
11,110

 
11,366

 
—

 
—

All other securities:
 
 
 
 
 
 
 
Collateralized mortgage obligations
132,633

 
136,933

 
59,960

 
57,943

Residential mortgage-backed securities
822,746

 
846,078

 
885,235

 
892,162

Commercial mortgage-backed securities
—

 
—

 
183,021

 
181,437

Total
$
1,613,345

 
$
1,645,344

 
$
1,129,285

 
$
1,132,615


The following table presents gains (losses) on securities for the three years ended December 31, 2014, 2013, and 2012.

Securities Gains (Losses)
(Amounts in thousands)
 
 
Year Ended December 31,
 
 
2014
 
2013
 
2012
 
Proceeds from sales
$
74,690

 
$
114,740

 
$
20,905

 
Gross realized gains
$
615

 
$
1,178

 
$
573

 
Gross realized losses
(85
)
 
(4
)
 
(778
)
 
Net realized gains (losses)
$
530

 
$
1,174

 
$
(205
)
(1) 
Income tax provision (benefit) on net realized gains (losses)
$
209

 
$
463

 
$
(81
)
 
(1) 
Includes net losses of $520,000 in 2012 associated with certain investment funds that make qualifying investments for purposes of supporting our community reinvestment initiatives in accordance with the Community Reinvestment Act ("CRA" investments). These investments are classified in other assets in the Consolidated Statements of Financial Condition. Effective in fourth quarter 2012, net losses from these investments are recorded in other non-interest expense in the Consolidated Statements of Income.

Refer to Note 13 for additional details of the securities available-for-sale portfolio and the related impact of unrealized gains (losses) on other comprehensive income.


107

4. LOANS

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

Loan Portfolio
(Amounts in thousands)
 
 
December 31,
 
2014
 
2013
Commercial and industrial
$
5,996,070

 
$
5,360,773

Commercial – owner-occupied commercial real estate
1,892,564

 
1,695,479

Total commercial
7,888,634

 
7,056,252

Commercial real estate
2,323,616

 
2,062,889

Commercial real estate – multi-family
593,103

 
513,194

Total commercial real estate
2,916,719

 
2,576,083

Construction
381,102

 
293,387

Residential real estate
361,565

 
341,868

Home equity
142,177

 
149,732

Personal
202,022

 
226,699

Total loans
$
11,892,219

 
$
10,644,021

Net deferred loan fees and unamortized discount and premium on loans, included as a reduction in total loans
$
47,017

 
$
37,063

Overdrawn demand deposits included in total loans
$
1,963

 
$
2,772


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

Loans Held-For-Sale
(Amounts in thousands)

 
December 31,
 
2014
 
2013
Mortgage loans held-for-sale (1)
$
42,215

 
$
17,619

Other loans held-for-sale (2)
72,946

 
9,197

Total loans held-for-sale
$
115,161

 
$
26,816

(1) 
Comprised of residential mortgage loan originations intended to be sold in the secondary market. The Company accounts for these loans under the fair value option. Refer to Note 20 for additional information regarding mortgage loans held-for-sale.
(2) 
Amounts at December 31, 2014 consists of $36.6 million of commercial, commercial real estate and construction loans carried at the lower of aggregate cost or fair value and $36.3 million of commercial, commercial real estate, construction, home equity and personal loans held-for-sale in connection with the pending sale of the Company's banking office located in Norcross, Georgia, which closed in January 2015. Amounts at December 31, 2013 represent commercial loans carried at the lower of aggregate cost or fair value. Generally, the Company intends to sell these loans within 30-60 days from the date the intent to sell was established.


108

Carrying Value of Loans Pledged
(Amounts in thousands)

 
December 31,
 
2014
 
2013
Loans pledged to secure outstanding borrowings or availability:
 
 
 
FRB discount window borrowings (1)
$
478,692

 
$
710,269

FHLB advances (2)
1,576,168

 
1,337,552

Total
$
2,054,860

 
$
2,047,821

(1) 
No borrowings were outstanding at December 31, 2014 or 2013.
(2) 
Refer to Notes 10 and 11 for additional information regarding FHLB advances.

Related Party Loans

Some of our executive officers and directors are clients of our Bank, and some of our executive officers and directors are direct or indirect owners of 10% or more of the stock of corporations which are, or have been in the past, clients of the Bank. These loans 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. These loans totaled $9.7 million and $14.2 million at December 31, 2014 and 2013, respectively.

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, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
7,855,833

 
$
762

 
$
992

 
$
—

 
$
7,857,587

 
$
31,047

 
$
7,888,634

Commercial real estate
2,891,301

 
5,408

 
261

 
—

 
2,896,970

 
19,749

 
2,916,719

Construction
380,939

 
163

 
—

 
—

 
381,102

 
—

 
381,102

Residential real estate
354,717

 
943

 
631

 
—

 
356,291

 
5,274

 
361,565

Home equity
128,500

 
397

 
2,236

 
—

 
131,133

 
11,044

 
142,177

Personal
201,569

 
23

 
—

 
—

 
201,592

 
430

 
202,022

Total loans
$
11,812,859

 
$
7,696

 
$
4,120

 
$
—

 
$
11,824,675

 
$
67,544

 
$
11,892,219

As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
7,031,318

 
$
2

 
$
153

 
$
—

 
$
7,031,473

 
$
24,779

 
$
7,056,252

Commercial real estate
2,523,023

 
5,946

 
161

 
—

 
2,529,130

 
46,953

 
2,576,083

Construction
293,387

 
—

 
—

 
—

 
293,387

 
—

 
293,387

Residential real estate
330,922

 
674

 
296

 
—

 
331,892

 
9,976

 
341,868

Home equity
136,341

 
1,108

 
404

 
—

 
137,853

 
11,879

 
149,732

Personal
225,922

 
124

 
2

 
—

 
226,048

 
651

 
226,699

Total loans
$
10,540,913

 
$
7,854

 
$
1,016

 
$
—

 
$
10,549,783

 
$
94,238

 
$
10,644,021


Impaired Loans

Impaired loans consist of nonaccrual loans (which include nonaccrual 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

109

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, 2014
 
 
 
 
 
 
 
 
 
Commercial
$
60,174

 
$
25,739

 
$
26,432

 
$
52,171

 
$
11,487

Commercial real estate
26,738

 
9,755

 
10,193

 
19,948

 
2,441

Residential real estate
5,849

 
349

 
4,925

 
5,274

 
735

Home equity
12,904

 
3,627

 
8,839

 
12,466

 
1,855

Personal
430

 
—

 
430

 
430

 
109

Total impaired loans
$
106,095

 
$
39,470

 
$
50,819

 
$
90,289

 
$
16,627

As of December 31, 2013
 
 
 
 
 
 
 
 
 
Commercial
$
44,471

 
$
30,039

 
$
11,774

 
$
41,813

 
$
4,895

Commercial real estate
61,112

 
10,301

 
38,203

 
48,504

 
12,536

Residential real estate
11,823

 
2,629

 
7,347

 
9,976

 
2,412

Home equity
13,893

 
2,567

 
10,903

 
13,470

 
2,386

Personal
651

 
—

 
651

 
651

 
148

Total impaired loans
$
131,950

 
$
45,536

 
$
68,878

 
$
114,414

 
$
22,377


Average Recorded Investment and Interest Income Recognized on Impaired Loans (1) 
(Amounts in thousands)
 
 
2014
 
2013
 
Average Recorded Investment
 
Interest Income
Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Commercial
$
51,030

 
$
1,441

 
$
72,050

 
$
2,265

Commercial real estate
32,256

 
67

 
64,887

 
428

Residential real estate
9,281

 
—

 
11,354

 
3

Home equity
12,592

 
88

 
14,665

 
120

Personal
582

 
—

 
2,784

 
—

Total
$
105,741

 
$
1,596

 
$
165,740

 
$
2,816

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

Credit Quality Indicators

We have adopted an internal risk rating policy in which each loan is rated for credit quality with a numerical rating of 1 through 8. Loans rated 5 and better (1-5 ratings, inclusive) are credits that we believe exhibit acceptable financial performance, cash flow, and leverage. We attempt to mitigate risk through loan structure, collateral, monitoring, and other credit risk management controls. Credits rated 6 are performing in accordance with contractual terms but are considered "special mention" as these credits

110

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. These loans continue to accrue interest but the ultimate collection of these loans in full is questionable due to the same conditions that characterize a 6-rated credit. These credits may also have somewhat increased risk profiles as a result of the current net worth and/or paying capacity of the obligor or guarantors or the value of the collateral pledged. These loans generally have a well-defined weakness that may jeopardize collection of the debt and are characterized by the distinct possibility that 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, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
93,130

 
1.2
 
 
$
78,562

 
1.0
 
 
$
31,047

 
0.4
 
 
$
7,888,634

Commercial real estate
 
3,552

 
0.1
 
 
746

 
*
 
 
19,749

 
0.7
 
 
2,916,719

Construction
 
—

 
—
 
 
—

 
—
 
 
—

 
—
 
 
381,102

Residential real estate
 
2,964

 
0.8
 
 
5,981

 
1.7
 
 
5,274

 
1.5
 
 
361,565

Home equity
 
1,170

 
0.8
 
 
2,108

 
1.5
 
 
11,044

 
7.8
 
 
142,177

Personal
 
173

 
0.1
 
 
45

 
*
 
 
430

 
0.2
 
 
202,022

Total
 
$
100,989

 
0.8
 
 
$
87,442

 
0.7
 
 
$
67,544

 
0.6
 
 
$
11,892,219

As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
62,272

 
0.9
 
 
$
87,391

 
1.2
 
 
$
24,779

 
0.4
 
 
$
7,056,252

Commercial real estate
 
1,016

 
*
 
 
4,489

 
0.2
 
 
46,953

 
1.8
 
 
2,576,083

Construction
 
—

 
—
 
 
—

 
—
 
 
—

 
—
 
 
293,387

Residential real estate
 
4,898

 
1.4
 
 
7,177

 
2.1
 
 
9,976

 
2.9
 
 
341,868

Home equity
 
2,884

 
1.9
 
 
2,538

 
1.7
 
 
11,879

 
7.9
 
 
149,732

Personal
 
187

 
0.1
 
 
177

 
0.1
 
 
651

 
0.3
 
 
226,699

Total
 
$
71,257

 
0.7
 
 
$
101,772

 
1.0
 
 
$
94,238

 
0.9
 
 
$
10,644,021

*
Less than 0.1%


111

Troubled Debt Restructured Loans
Troubled Debt Restructured Loans Outstanding
(Amounts in thousands)

 
December 31,
 
2014
 
2013
 
Accruing
 
Nonaccrual (1)
 
Accruing
 
Nonaccrual (1)
Commercial
$
21,124

 
$
20,113

 
$
17,635

 
$
6,188

Commercial real estate
199

 
8,005

 
950

 
19,309

Residential real estate
—

 
1,881

 
—

 
2,239

Home equity
1,422

 
5,886

 
1,591

 
3,805

Personal
—

 
413

 
—

 
641

Total
$
22,745

 
$
36,298

 
$
20,176

 
$
32,182

(1) 
Included in nonperforming loans.

At December 31, 2014 and 2013, credit commitments to lend additional funds to debtors whose loan terms have been modified in a TDR (both accruing and nonaccruing) totaled $8.5 million and $5.5 million, respectively.

Additions to Accruing Troubled Debt Restructurings During the Year
(Dollars in thousands)

 
Year Ended December 31, 2014
 
Year Ended December 31, 2013
 
Number of Borrowers
 
Recorded Investment (1)
 
Number of Borrowers
 
Recorded Investment (1)
 
Pre-Modification
 
Post-Modification
 
Pre-Modification
 
Post-Modification
Commercial
 
 
 
 
 
 
 
 
 
 
 
Extension of maturity date (2)
4

 
$
20,725

 
$
20,725

 
6

 
$
7,288

 
$
7,288

Other concession (3)
5

 
21,289

 
21,289

 
—

 
—

 
—

Total commercial
9

 
42,014

 
42,014

 
6

 
7,288

 
7,288

Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
Extension of maturity date (2)
1

 
202

 
202

 
1

 
244

 
244

Other concession (3)
1

 
426

 
426

 
1

 
717

 
717

Total commercial real estate
2

 
628

 
628

 
2

 
961

 
961

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
Extension of maturity date (2)
—

 
—

 
—

 
1

 
150

 
150

Total accruing
11

 
$
42,642

 
$
42,642

 
9

 
$
8,399

 
$
8,399

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


112

Additions to Nonaccrual Troubled Debt Restructurings During the Year
(Dollars in thousands)
 
 
Year Ended December 31, 2014
 
Year Ended December 31, 2013
 
Number of Borrowers
 
Recorded Investment (1)
 
Number of Borrowers
 
Recorded Investment (1)
 
Pre-Modification
 
Post-Modification
 
 
Pre-Modification
 
Post-Modification
Commercial
 
 
 
 
 
 
 
 
 
 
 
Extension of maturity date (2)
—

 
$
—

 
$
—

 
2

 
$
334

 
$
334

Other concession (3)
10

 
17,900

 
17,822

 
6

 
1,795

 
1,795

Total commercial
10

 
17,900

 
17,822

 
8

 
2,129

 
2,129

Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
Extension of maturity date (2)
—

 
—

 
—

 
1

 
297

 
297

Other concession (3)
3

 
2,057

 
2,070

 
10

 
18,562

 
7,475

Total commercial real estate
3

 
2,057

 
2,070

 
11

 
18,859

 
7,772

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
Other concession (3)
5

 
961

 
1,034

 
1

 
342

 
342

Home equity
 
 
 
 
 
 
 
 
 
 
 
Extension of maturity date (2)
1

 
114

 
114

 
5

 
824

 
824

Other concession (3)
8

 
2,780

 
2,793

 
8

 
1,760

 
1,753

Total home equity
9

 
2,894

 
2,907

 
13

 
2,584

 
2,577

Personal
 
 
 
 
 
 
 
 
 
 
 
Other concession (3)
—

 
—

 
—

 
2

 
478

 
478

Total nonaccrual
27

 
$
23,812

 
$
23,833

 
35

 
$
24,392

 
$
13,298

Change in recorded investment due to net (advances) principal paydowns at time of modification
 
 
 
 
$
(21
)
 
 
 
 
 
$
7,916

Change in recorded investment due to charge-offs at time of modification
 
 
 
 
$
—

 
 
 
 
 
$
3,398

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

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 $10.6 million and $8.6 million in specific reserves for nonaccrual TDRs at December 31, 2014 and 2013, respectively. For accruing TDRs, there were no specific reserves at December 31, 2014 and $37,000 at December 31, 2013, with the specific reserve representing the difference between the present value of cash flows for the restructured loan as compared to the recorded investment in the loan.


113

The following table presents the recorded investment and number of loans modified as an accruing TDR during the previous 12 months which subsequently became nonperforming during the years ended December 31, 2014 and 2013. A loan becomes nonperforming and placed on nonaccrual status typically when the principal or interest payments are 90 days past due based on contractual terms or when an individual analysis of a borrower’s creditworthiness indicates a loan should be placed on nonaccrual status earlier than when the loan becomes 90 days past due.

Accruing Troubled Debt Restructurings
Reclassified as Nonperforming Within 12 Months of Restructuring
(Dollars in thousands)
 
 
Year Ended December 31,
 
2014
 
2013
 
Number of
Borrowers
 
Recorded
Investment (1)
 
Number of
Borrowers
 
Recorded
Investment (1)
Commercial
—

 
$
—

 
1

 
$
149

Commercial real estate
1

 
699

 
2

 
5,258

Residential real estate
2

 
57

 
—

 
—

Total
3

 
$
756

 
3

 
$
5,407

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


114

5. ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED COMMITMENTS

The following allowance and credit quality disclosures exclude covered loans. Refer to Note 6 for a detailed discussion regarding covered loans.

Allowance for Loan Losses and Recorded Investment in Loans
(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.


115

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

 
Year Ended December 31, 2013
 
Commercial 
 
Commercial Real Estate
 
Construction 
 
Residential
Real
Estate
 
Home
Equity
 
Personal
 
Total
Allowance for Loan Losses:
Balance at beginning of year
$
63,709

 
$
73,150

 
$
2,434

 
$
9,696

 
$
6,797

 
$
5,631

 
$
161,417

Loans charged-off
(22,339
)
 
(25,294
)
 
70

 
(3,501
)
 
(3,445
)
 
(3,725
)
 
(58,234
)
Recoveries on loans previously charged-off
5,054

 
2,173

 
48

 
15

 
475

 
997

 
8,762

Net (charge-offs) recoveries
(17,285
)
 
(23,121
)
 
118

 
(3,486
)
 
(2,970
)
 
(2,728
)
 
(49,472
)
Provision (release) for loan losses
34,344

 
(7,667
)
 
786

 
1,345

 
1,821

 
535

 
31,164

Balance at end of year
$
80,768

 
$
42,362

 
$
3,338

 
$
7,555

 
$
5,648

 
$
3,438

 
$
143,109

Ending balance, loans individually evaluated for impairment (1)
$
4,895

 
$
12,536

 
$
—

 
$
2,412

 
$
2,386

 
$
148

 
$
22,377

Ending balance, loans collectively evaluated for impairment
$
75,873

 
$
29,826

 
$
3,338

 
$
5,143

 
$
3,262

 
$
3,290

 
$
120,732

Recorded Investment in Loans:
Ending balance, loans individually evaluated for impairment (1)
$
41,813

 
$
48,504

 
$
—

 
$
9,976

 
$
13,470

 
$
651

 
$
114,414

Ending balance, loans collectively evaluated for impairment
7,014,439

 
2,527,579

 
293,387

 
331,892

 
136,262

 
226,048

 
10,529,607

Total recorded investment in loans
$
7,056,252

 
$
2,576,083

 
$
293,387

 
$
341,868

 
$
149,732

 
$
226,699

 
$
10,644,021

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


116

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

 
Year Ended December 31, 2012
 
Commercial 
 
Commercial Real Estate
 
Construction 
 
Residential
Real
Estate
 
Home
Equity
 
Personal
 
Total
Allowance for Loan Losses:
Balance at beginning of year
$
60,663

 
$
94,905

 
$
12,852

 
$
6,376

 
$
4,022

 
$
12,776

 
$
191,594

Loans charged-off
(31,768
)
 
(68,099
)
 
(1,979
)
 
(3,010
)
 
(3,128
)
 
(10,044
)
 
(118,028
)
Recoveries on loans previously charged-off
4,179

 
8,709

 
2,315

 
126

 
509

 
1,137

 
16,975

Net (charge-offs) recoveries
(27,589
)
 
(59,390
)
 
336

 
(2,884
)
 
(2,619
)
 
(8,907
)
 
(101,053
)
Provision (release) for loan losses
30,635

 
37,635

 
(10,754
)
 
6,204

 
5,394

 
1,762

 
70,876

Balance at end of year
$
63,709

 
$
73,150

 
$
2,434

 
$
9,696

 
$
6,797

 
$
5,631

 
$
161,417

Ending balance, loans individually evaluated for impairment (1)
$
13,259

 
$
20,450

 
$
117

 
$
3,996

 
$
2,797

 
$
2,771

 
$
43,390

Ending balance, loans collectively evaluated for impairment
$
50,450

 
$
52,700

 
$
2,317

 
$
5,700

 
$
4,000

 
$
2,860

 
$
118,027

Recorded Investment in Loans:
Ending balance, loans individually evaluated for impairment (1)
$
86,180

 
$
83,312

 
$
557

 
$
11,689

 
$
13,200

 
$
4,822

 
$
199,760

Ending balance, loans collectively evaluated for impairment
6,410,388

 
2,592,589

 
189,939

 
361,891

 
154,560

 
230,855

 
9,940,222

Total recorded investment in loans
$
6,496,568

 
$
2,675,901

 
$
190,496

 
$
373,580

 
$
167,760

 
$
235,677

 
$
10,139,982

(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,
 
2014
 
2013
 
2012
Balance at beginning of year
$
9,206

 
$
7,343

 
$
7,277

Provision for unfunded commitments
3,152

 
1,863

 
66

Charge-off of unfunded commitments
(84
)
 
—

 
—

Balance at end of year
$
12,274

 
$
9,206

 
$
7,343

 Unfunded commitments, excluding covered assets, at year end
$
6,265,506

 
$
5,028,268

 
$
4,707,373

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

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


117

6. COVERED ASSETS

Covered assets represent acquired loans and foreclosed loan collateral covered under a loss sharing agreement with the FDIC and include an indemnification receivable representing the present value of the expected reimbursement from the FDIC related to expected losses on the acquired loans and foreclosed real estate under such agreement. The loss share agreement expired on September 30, 2014 for non-residential mortgage loans and related assets. At the time of expiration $28.7 million of covered loans were transferred into our held for investment loan portfolio and $719,000 of covered OREO was transferred into the OREO portfolio. The loss share agreement will expire on September 30, 2019 for residential mortgage loans and related assets.

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

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

 
$
—

 
$
—

 
$
11,562

 
$
—

 
$
11,562

Commercial real estate loans
—

 
—

 
—

 
46,657

 
—

 
46,657

Residential mortgage loans
32,182

 
—

 
32,182

 
36,883

 
—

 
36,883

Consumer installment and other
—

 
—

 
—

 
3,213

 
259

 
3,472

Foreclosed real estate
—

 
187

 
187

 
—

 
7,880

 
7,880

Estimated loss reimbursement by the FDIC
—

 
1,763

 
1,763

 
—

 
6,292

 
6,292

Total covered assets
32,182

 
1,950

 
34,132

 
98,315

 
14,431

 
112,746

Allowance for covered loan losses
(5,191
)
 
—

 
(5,191
)
 
(16,511
)
 
—

 
(16,511
)
Net covered assets
$
26,991

 
$
1,950

 
$
28,941

 
$
81,804

 
$
14,431

 
$
96,235

Nonperforming covered loans (2)
$
6,828

 
 
 
 
 
$
15,610

 
 
 
 
(1) 
Purchased loans include $420,000 and $7.6 million of purchased impaired loans as of December 31, 2014 and 2013, respectively.
(2) 
Excludes purchased impaired loans which are accounted for on a pool basis based on common risk characteristics as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Because we are recognizing interest income on each pool of loans, all purchased impaired loans are considered to be performing.

7. PREMISES, FURNITURE, AND EQUIPMENT

Premises, Furniture, and Equipment
(Amounts in thousands)
 
 
December 31,
 
2014
 
2013
Land
$
1,874

 
$
1,874

Building
9,980

 
7,581

Leasehold improvements
37,796

 
39,644

Furniture and equipment
45,346

 
42,044

Software
16,363

 
14,421

Total cost
111,359

 
105,564

Accumulated depreciation
(72,216
)
 
(65,860
)
Net book value
$
39,143

 
$
39,704


Depreciation expense on premises, furniture, and equipment totaled $8.7 million in 2014, $8.5 million in 2013, and $9.3 million in 2012.

118


At December 31, 2014, we were obligated under certain non-cancellable operating leases for premises and equipment, which expire at various dates through the year 2023. 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, 2014, have initial or remaining non-cancellable lease terms in excess of one year.

Operating Leases (1) 
(Amounts in thousands)
 
 
Total
Year Ended December 31,
 
2015
$
12,794

2016
11,376

2017
10,926

2018
10,632

2019
9,974

2020 and thereafter
32,942

Total minimum lease payments
$
88,644

(1) 
Minimum payments have not been reduced by minimum sublease rentals of $2.0 million due in the future under non-cancellable subleases.

 
Year Ended December 31,
 
2014
 
2013
 
2012
Rental expense charged to operations (1)(2)
$
12,066

 
$
12,224

 
$
12,128

Rental income from premises leased to others (2)
$
704

 
$
659

 
$
676

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

8. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the Carrying Amount of Goodwill by Reporting Unit
(Amounts in thousands)
 
 
Banking
 
Asset Management
 
Holding Company Activities
 
Consolidated 
Balance at December 31, 2012
$
81,755

 
$
12,766

 
$
—

 
$
94,521

Sale of Lodestar
—

 
(226
)
 
—

 
(226
)
Tax benefit adjustment
—

 
(254
)
 
—

 
(254
)
Balance at December 31, 2013
81,755

 
12,286

 
—

 
94,041

Tax benefit adjustment
—

 
—

 
—

 
—

Balance at December 31, 2014
$
81,755

 
$
12,286

 
$
—

 
$
94,041


In connection with the sale of Lodestar Investment Counsel, LLC ("Lodestar") on December 31, 2013, an investment management firm and previously a wholly-owned subsidiary of the Company, $226,000 of the goodwill assigned to the Asset Management reporting unit was allocated to Lodestar and written off. A goodwill impairment charge of $146,000 was recorded in connection with the sale. Goodwill also decreased $254,000 due to an adjustment for tax benefits associated with the goodwill attributable to Lodestar.


119

For our annual goodwill impairment test performed as of October 31, 2014, as permitted under current accounting guidance, we elected to not perform a qualitative assessment and instead chose to proceed with the quantitative two-step test. As a result of our step one analysis, we determined that the fair value of both the Banking and Asset management reporting units exceeded their respective carrying amounts. As such, both of our reporting units with allocated goodwill "passed" step one of the goodwill impairment test, and no further analysis was required to support the conclusion that goodwill was not impaired as of October 31, 2014. The Banking reporting unit's fair value exceeded its carrying amount by approximately 97%, while the Asset Management reporting unit's fair value exceeded its carrying amount by approximately 250%.

The fair value of the reporting units as determined in our annual goodwill impairment test resulted in an implied control premium in excess of our market capitalization of approximately 15%. We believe this control premium is reasonable and supports the appropriate estimation of the reporting units' fair value as compared to our market capitalization.

We are not aware of any events or circumstances subsequent to our annual goodwill impairment testing date of October 31, 2014 that would indicate impairment of goodwill allocated to the Banking and Asset Management reporting units at December 31, 2014. There were no impairment charges for goodwill allocated to the Banking and Asset Management (excluding Lodestar) reporting units recorded in 2013 or 2012.

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

We review intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. In connection with the sale of Lodestar on December 31, 2013, we reduced the client relationships intangibles net carrying amount by $815,000. During 2014, there were no events or circumstances that we believe indicate there may be impairment of intangible assets, and no impairment charges for other intangible assets were recorded in 2014, 2013, or 2012.

Other Intangible Assets
(Amounts in thousands)

 
Year Ended December 31,
 
2014
 
2013
 
2012
Core deposit intangible:
 
 
 
 
 
Gross carrying amount
$
18,093

 
$
18,093

 
$
18,093

Accumulated amortization
12,870

 
10,071

 
7,362

Net carrying amount
$
5,223

 
$
8,022

 
$
10,731

Amortization during the period
$
2,799

 
$
2,709

 
$
2,282

Weighted-average remaining life (in years)
2

 
3

 
4

Client relationships:
 
 
 
 
 
Gross carrying amount
$
2,002

 
$
2,002

 
$
5,059

Accumulated amortization
1,340

 
1,132

 
2,962

Net carrying amount
$
662

 
$
870

 
$
2,097

Amortization during the period
$
208

 
$
412

 
$
402

Weighted-average remaining life (in years)
6

 
7

 
7



120

Scheduled Amortization of Other Intangible Assets
(Amounts in thousands)
 
 
Total
Year Ended December 31,
 
2015
$
2,455

2016
2,161

2017
1,125

2018
98

2019
28

2020 and thereafter
18

Total
$
5,885


9. DEPOSITS

Summary of Deposits
(Amounts in thousands)
 
 
December 31,
 
2014 (1)
 
2013
Noninterest-bearing deposits
$
3,516,695

 
$
3,172,676

Interest-bearing deposits
1,907,320

 
1,470,856

Savings deposits
319,100

 
284,482

Money market accounts
4,851,925

 
4,515,079

Time deposits less than $100,000
296,899

 
346,812

Time deposits of $100,000 or more
2,198,029

 
2,223,736

Total deposits
$
13,089,968

 
$
12,013,641

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

Maturities of Time Deposits of $100,000 or More (1) 
(Amounts in thousands)
 
 
2014
Maturing within 3 months
$
466,612

After 3 but within 6 months
398,345

After 6 but within 12 months
748,917

After 12 months
584,155

Total
$
2,198,029

(1) 
Excludes time deposits held-for-sale of $32.2 million as of December 31, 2014.


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10. SHORT-TERM AND SECURED BORROWINGS

Summary of Short-Term Borrowings
(Dollars in thousands)
 
 
December 31, 2014
 
December 31, 2013
 
Amount
 
Rate
 
Amount
 
Rate
Outstanding:
 
 
 
 
 
 
 
FHLB advances
$
428,000

 
0.13
%
 
$
2,000

 
3.37
%
Other Information:
 
 
 
 
 
 
 
Weighted-average remaining maturity of FHLB advances at year end
7 months

 
 
 
12 months

 
 
Unused FHLB advances availability
$
265,529

 
 
 
$
395,302

 
 
Unused overnight federal funds availability (1)
$
630,500

 
 
 
$
520,000

 
 
Borrowing capacity through the FRB discount window primary credit program (2)
$
403,752

 
 
 
$
621,855

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

FHLB Advances - At December 31, 2014, FHLB advances consisted of $8.0 million from the FHLB Atlanta, of which $3.0 million is included in short-term borrowings, and $470.0 million from FHLB Chicago, of which $425.0 million is included in short-term borrowings. As a member of the FHLB Chicago, the Bank has access to a 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, 2014, our borrowing capacity was $735.9 million of which $265.5 million is available, subject to the additional investment in FHLB Chicago stock required. Qualifying residential, multi-family and commercial real estate loans, home equity lines of credit, and residential mortgage-backed securities are pledged as collateral to secure current outstanding balances and additional borrowing availability. FHLB advances reported as short-term borrowings represent advances with a remaining maturity of one year or less at December 31, 2014 and 2013.

Revolving Line of Credit - During the third quarter 2014, the Company amended its $60.0 million 364-day Revolving Line of Credit (the "Facility") with a group of commercial banks resulting in a new maturity date of September 25, 2015. Any amounts outstanding under the Facility upon maturity may be converted, at the Company's option, to an amortizing term loan, with the balance of such loan due September 26, 2017. Loans under the Facility bear interest, at the Company's election, either at a floating rate equal to LIBOR plus 1.95%, or a defined base rate minus 0.50%. At December 31, 2014, no amounts have been drawn on the Facility.

Secured Borrowings - Also included in short-term and secured borrowings on the Consolidated Statements of Financial Condition are amounts related to certain loan participation agreements on loans we originated that were classified as secured borrowings because they did not qualify for sale accounting treatment. As of December 31, 2014 and 2013, these loan participation agreements totaled $4.4 million and $6.4 million, respectively. A corresponding amount was recorded within loans on the Consolidated Statements of Financial Condition at each of these dates.


122

11. LONG-TERM DEBT

Long-Term Debt
(Dollars in thousands)
 
 
 
 
 
 
 
December 31,
 
 
 
 
 
 
2014
 
2013
Parent Company:
 
 
 
 
 
 
 
 
2.89% junior subordinated debentures due 2034
(1)(a) 
$
8,248

 
$
8,248

1.95% junior subordinated debentures due 2035
(2)(a) 
51,547

 
51,547

1.74% junior subordinated debentures due 2035
(3)(a) 
41,238

 
41,238

10.00% junior subordinated debentures due 2068
(a) 
68,755

 
143,760

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

 
125,000

Subtotal
294,788

 
369,793

Subsidiaries:
 
 
 
 
 
 
 
 
FHLB advances
50,000

 
258,000

Total long-term debt
$
344,788

 
$
627,793

 
(1) 
Variable rate in effect at December 31, 2014, based on three-month LIBOR +2.65%.
(2) 
Variable rate in effect at December 31, 2014, based on three-month LIBOR +1.71%.
(3) 
Variable rate in effect at December 31, 2014, based on three-month LIBOR +1.50%.
(a) 
Under the final regulatory capital rules issued in July 2013, these instruments are grandfathered for inclusion as a component of Tier 1 capital, although the Tier 1 capital treatment for these instruments will be subject to phase-out due to certain acquisitions.
(b) 
Qualifies as Tier 2 capital for regulatory capital purposes.

The 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. On October 8, 2014, we redeemed $75.0 million of the $143.8 million outstanding 10% junior subordinated debentures due 2068 (the "10% Debentures"). The redemption price was the liquidation amount of $25 per trust preferred security. Refer to Note 12 for further information on the nature and terms of these and previously issued debentures.

At December 31, 2014, 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 backed securities to support additional borrowings.


123

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

 
—
%
 
$
1,000

 
3.71
%
December 21, 2015
—

 
—
%
 
2,000

 
4.22
%
December 31, 2015
—

 
—
%
 
250,000

 
0.09
%
March 25, 2019
2,000

 
4.26
%
 
2,000

 
4.26
%
May 22, 2019
3,000

 
4.68
%
 
3,000

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

 
3.72
%
 
—

 
—
%
September 26, 2019 (1)
15,000

 
3.69
%
 
—

 
—
%
December 9, 2019 (2)
15,000

 
3.58
%
 
—

 
—
%
Total
$
50,000

 
3.75
%
 
$
258,000

 
0.22
%
(1) 
Provides for a one-time option to increase the advances in September 2016, up to $150.0 million each at the same fixed rate as the original advance. The advances include prepayment features and are subject to a prepayment fee.
(2) 
Provides for a one-time option to increase the advances in December 2016, up to $150.0 million each at the same fixed rate as the original advance. The advances include prepayment features and are subject to a prepayment fee.

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

2020 and thereafter
294,788

Total
$
344,788


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

As of December 31, 2014, we sponsored and wholly owned 100% of the common equity of four trusts that were formed for the purpose of issuing Company obligated mandatorily redeemable trust preferred securities ("Trust Preferred Securities") to third-party investors and investing the proceeds from the sale of the Trust Preferred Securities solely in a series of junior subordinated debentures of the Company ("Debentures"). The Debentures held by the trusts, which in aggregate totaled $169.8 million at December 31, 2014, are the sole assets of each respective trust. Our obligations under the Debentures and related documents, including the indentures, the declarations of trust and related Company guarantees, taken together, constitute a full and unconditional guarantee by the Company on a subordinated basis of distributions and redemption payments and liquidation payments on the Trust Preferred Securities. We currently have the right to redeem, in whole or in part, subject to any required regulatory approval, all or any series of the Debentures, in each case, at a redemption price of 100% of the principal amount of the Debentures being redeemed plus any accrued but unpaid interest to the redemption date. The repayment, redemption or repurchase of any of the Debentures would be subject to the terms of the applicable indenture and would result in a corresponding repayment, redemption or repurchase of an equivalent amount of the related series of Trust Preferred Securities. Any redemption of the 10% Debentures held by the PrivateBancorp Capital Trust IV ("Capital Trust IV""), would be subject to the terms of the replacement capital covenant described below and any required regulatory approval.

In connection with the issuance in 2008 of the 10% Debentures, which rank junior to the other Debentures, we entered into a replacement capital covenant that relates to 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

124

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.

Subsequent to October 10, 2012, the Company raised the required qualifying capital and upon receipt of regulatory approval in September 2014, Capital Trust IV redeemed $75.0 million of the $143.8 million outstanding 10% Trust Preferred Securities on October 8, 2014. The redemption of the Trust Preferred Securities was a result of the redemption by the Company of approximately $75.0 million of the outstanding 10% Debentures due June 2068, all of which are held by Capital Trust IV. We used available cash to fund the redemption. The proceeds from the partial redemption of the 10% Debentures were applied to redeem a proportionate amount of the Trust Preferred Securities and the Trust’s common securities, which totaled $75.0 million of Trust Preferred Securities and $5,225 of Trust common securities.

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

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

 
$
8,000

 
2.89
%
 
June 17, 2009
 
June 2034
 
$
8,248

 
$
8,248

PrivateBancorp Statutory Trust II
June 2005
 
1,547

 
50,000

 
1.95
%
 
Sept. 15, 2010
 
Sept. 2035
 
51,547

 
51,547

PrivateBancorp Statutory Trust III
Dec. 2005
 
1,238

 
40,000

 
1.74
%
 
Dec. 5, 2010
 
Dec. 2035
 
41,238

 
41,238

PrivateBancorp Capital Trust IV
May 2008
 
5

 
68,750

 
10.00
%
 
June 15, 2013
 
June 2068
 
68,755

 
143,760

Total
 
 
$
3,038

 
$
166,750

 
 
 
 
 
 
 
$
169,788

 
$
244,793

 
(1) 
The trust preferred securities accrue distributions at a rate equal to the interest rate on and have a maturity identical to that of the related Debentures. The trust preferred securities will be redeemed upon maturity or earlier redemption of the related Debentures.
(2) 
Reflects the coupon rate in effect at December 31, 2014. The coupon rate for the Bloomfield Hills Statutory Trust I is a variable rate and is based on three-month LIBOR plus 2.65%. The coupon rates for the PrivateBancorp Statutory Trusts II and III are at a variable rate based on three-month LIBOR plus 1.71% for Trust II and three-month LIBOR plus 1.50% for Trust III. The coupon rate for the PrivateBancorp Capital Trust IV is fixed. Distributions for all of the Trusts are payable quarterly. We have the right to defer payment of interest on the Debentures at any time or from time to time for a period not exceeding ten years in the case of the Debentures held by Trust IV, and five years in the case of all other Debentures, without causing an event of default under the related indenture, provided no extension period may extend beyond the stated maturity of the Debentures. During such extension period, distributions on the trust preferred securities would also be deferred, and our ability to pay dividends on our common stock would generally be prohibited. The Federal Reserve has the ability to prevent interest payments on the Debentures.
(3) 
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the Debentures at maturity or upon their earlier redemption in whole or in part. The Debentures are redeemable in whole or in part prior to maturity at any time after the dates shown in the table and, only after we have obtained Federal Reserve approval, if then required under applicable guidelines or regulations.

13. EQUITY

Conversion of Nonvoting Common Stock

Holders of our nonvoting common stock converted 1.58 million shares and 1.95 million shares in 2014 and 2013, respectively, into an equal number of newly-issued shares of our voting common stock on a one-for-one basis. The conversion was done in accordance with the terms of the nonvoting common stock and in connection with the holders' sale of such newly-issued voting common stock. At December 31, 2014, there were no shares of nonvoting common stock outstanding.

125


Capital Issuances and Preferred Stock Redemption

In the fourth quarter 2012, the Company repurchased all of the preferred stock totaling $243.8 million, or 243,815 shares and the related ten-year warrant held by the U.S. Treasury, using net proceeds raised from a $75.0 million underwritten public offering of its common stock (4,761,905 shares with an offering price of $15.75 per share) and net proceeds from the $125.0 million subordinated debentures offering, together with existing cash resources. The preferred stock and warrant were originally issued in January 2009 as part of the Troubled Asset Relief Program ("TARP") Capital Purchase Program ("CPP"). In connection with the repurchase of the preferred stock, the Company accelerated the accretion of the remaining issuance discount on the preferred stock of $2.2 million. The Company repurchased the warrant at a mutually agreed upon price of $1.2 million, which was recorded as a reduction to additional paid-in capital in the Company's Consolidated Financial Statements.

At December 31, 2014, there were 1,000,000 shares of preferred stock authorized, and none outstanding.

There were no public or private offerings of common stock during 2014 or 2013 other than common stock issued in connection with our share-based compensation plans. Refer to Note 16 for a detailed discussion of such plans.

Treasury Stock

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 2,000 shares and 274,000 shares in treasury at December 31, 2014 and 2013, respectively. Prior to 2013, the Company issued new shares to fulfill its obligation to settle share-based awards.


126

Comprehensive Income

Change in Accumulated Other Comprehensive Income ("AOCI") by Component
(Amounts in thousands)
 
Year Ended December 31,
 
2014
 
2013
 
2012
 
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
$
12,960

 
$
(3,116
)
 
$
9,844

 
$
42,219

 
$
5,845

 
$
48,064

 
$
45,140

 
1,557

 
$
46,697

Increase in unrealized gains (losses) on securities
11,244

 
—

 
11,244

 
(46,690
)
 
—

 
(46,690
)
 
(4,185
)
 
—

 
(4,185
)
Increase in unrealized gains (losses) on cash flow hedges
—

 
16,777

 
16,777

 
—

 
(8,729
)
 
(8,729
)
 
—

 
9,945

 
9,945

Tax (expense) benefit on increase in unrealized (losses) gains
(4,435
)
 
(6,576
)
 
(11,011
)
 
18,142

 
3,390

 
21,532

 
1,455

 
(3,883
)
 
(2,428
)
Other comprehensive income (loss) before reclassifications
6,809

 
10,201

 
17,010

 
(28,548
)
 
(5,339
)
 
(33,887
)
 
(2,730
)
 
6,062

 
3,332

Reclassification adjustment of net gains included in net income (1)
(530
)
 
(9,262
)
 
(9,792
)
 
(1,174
)
 
(5,984
)
 
(7,158
)
 
(315
)
 
(2,928
)
 
(3,243
)
Reclassification adjustment for tax expense on realized net gains (2)
209

 
3,646

 
3,855

 
463

 
2,362

 
2,825

 
124

 
1,154

 
1,278

Amounts reclassified from AOCI
(321
)
 
(5,616
)
 
(5,937
)
 
(711
)
 
(3,622
)
 
(4,333
)
 
(191
)
 
(1,774
)
 
(1,965
)
Net current period other comprehensive income (loss)
6,488

 
4,585

 
11,073

 
(29,259
)
 
(8,961
)
 
(38,220
)
 
(2,921
)
 
4,288

 
1,367

Balance at end of year
$
19,448

 
$
1,469

 
$
20,917

 
$
12,960

 
$
(3,116
)
 
$
9,844

 
$
42,219

 
$
5,845

 
$
48,064

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

127

14. EARNINGS PER COMMON SHARE

Basic and Diluted Earnings per Common Share
(Amounts in thousands, except per share data)
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
Basic earnings per common share
 
 
 
 
 
Net income
$
153,079

 
$
122,949

 
$
77,896

Preferred stock dividends and discount accretion
—

 
—

 
(13,368
)
Net income available to common stockholders
153,079

 
122,949

 
64,528

Net income allocated to participating stockholders (1)
(2,134
)
 
(2,436
)
 
(1,145
)
Net income allocated to common stockholders
$
150,945

 
$
120,513

 
$
63,383

Weighted-average common shares outstanding
77,007

 
76,398

 
71,951

Basic earnings per common share
$
1.96

 
$
1.58

 
$
0.88

Diluted earnings per common share
 
 
 
 
 
Diluted earnings applicable to common stockholders (2)
$
150,967

 
$
120,520

 
$
63,383

Weighted-average diluted common shares outstanding:
 
 
 
 
 
Weighted-average common shares outstanding
77,007

 
76,398

 
71,951

Dilutive effect of stock awards (3)
815

 
247

 
223

Weighted-average diluted common shares outstanding
77,822

 
76,645

 
72,174

Diluted earnings per common share
$
1.94

 
$
1.57

 
$
0.88

(1) 
Participating stockholders are those that hold certain share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents. Such shares or units are considered participating securities (i.e., certain of the Company’s deferred and restricted stock units and nonvested restricted stock awards).
(2) 
Net income allocated to common stockholders for basic and diluted earnings per share may differ under the two-class method as a result of adding common stock equivalents for options to dilutive shares outstanding, which alters the ratio used to allocate earnings to common stockholders and participating securities for the purposes of calculating diluted earnings per share.
(3) 
For the years ended December 31, 2014, 2013, and 2012, the weighted-average outstanding non-participating securities of 1.2 million, 2.9 million and 3.7 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.

15. INCOME TAXES

Components of Income Taxes
(Amounts in thousands)
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
Current tax provision:
 
 
 
 
 
Federal
$
86,234

 
$
51,169

 
$
31,521

State
17,078

 
11,179

 
7,172

Total
103,312

 
62,348

 
38,693

Deferred tax (benefit) provision:
 
 
 
 
 
Federal
(7,392
)
 
11,749

 
11,668

State
(792
)
 
2,897

 
4,160

Total
(8,184
)
 
14,646

 
15,828

Total income tax provision
$
95,128

 
$
76,994

 
$
54,521



128

Reconciliation of Income Tax Provision to Statutory Federal Rate
(Amounts in thousands)
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
Income tax provision at statutory federal income tax rate
$
86,872

 
$
69,980

 
$
46,346

(Decrease) increase in taxes resulting from:
 
 
 
 
 
Tax exempt interest
$
(2,139
)
 
$
(2,158
)
 
$
(1,956
)
Meals, entertainment and related expenses
621

 
577

 
483

Bank owned life insurance
(470
)
 
(473
)
 
(542
)
Investment credits
(331
)
 
(331
)
 
(314
)
Non-deductible compensation
148

 
172

 
1,880

State income taxes
10,292

 
8,618

 
6,039

Share-based compensation charges
—

 
200

 
2,468

Deferred tax asset adjustments
504

 
500

 
1,136

Other
(369
)
 
(91
)
 
(1,019
)
Total income tax provision
$
95,128

 
$
76,994

 
$
54,521


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,
 
2014
 
2013
Deferred tax assets:
 
Allowance for loan losses
$
64,832

 
$
60,090

Share-based payment expenses
16,883

 
15,310

Deferred compensation
4,285

 
3,950

Loan fees
18,871

 
15,088

OREO write-downs and expenses
7,008

 
9,281

Nonaccrual interest income
1,874

 
2,505

Covered assets – loans and OREO
4,636

 
8,023

Other
3,426

 
5,579

Total deferred tax assets
121,815

 
119,826

Deferred tax liabilities:
 
 
 
Unrealized gain on securities available-for-sale
(12,450
)
 
(8,305
)
Intangible assets and acquisition adjustments
(7,504
)
 
(8,232
)
Premises and equipment
(1,889
)
 
(1,919
)
Covered assets – FDIC loss share receivable
(694
)
 
(2,482
)
Other
(1,094
)
 
(243
)
Total deferred tax liabilities
(23,631
)
 
(21,181
)
Net deferred tax assets
$
98,184

 
$
98,645


Deferred Tax Assets

At December 31, 2014, we have concluded that it is more likely than not that the deferred tax assets will be realized and no valuation allowance was recorded. This conclusion was based in part on the fact that we were not in a cumulative book loss position

129

for financial statement purposes at December 31, 2014, measured on a trailing three-year basis. In addition, we considered 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.

Taxable income in prior years and reversing deferred taxable temporary differences provide sources from which deferred tax assets may be absorbed. Most significantly, however, 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,
 
2014
 
2013
 
2012
Balance at beginning of year
$
411

 
$
179

 
$
499

Additions for tax positions related to prior years
—

 
263

 
77

Reductions for tax positions related to prior years
(142
)
 
—

 
(380
)
Reductions for lapse of statute of limitations
—

 
(31
)
 
(17
)
Balance at end of year
$
269

 
$
411

 
$
179

Interest and penalties, net of tax effect, recognized in income tax (benefit) expense during the year
$
(6
)
 
$
33

 
$
(31
)
Interest and penalties, net of tax effect, accrued at year end (1)
$
54

 
$
60

 
$
27

(1) 
Not included in the unrecognized tax benefits roll forward presented above.

As of December 31, 2014 and 2013, we had unrecognized tax benefits relating to uncertain tax positions that, if recognized, would favorably impact the effective tax rate by $212,000 and $347,000, respectively. While it is expected that the amount of unrecognized tax benefits will change in the next twelve months, the Company does not anticipate this change will have a material impact on the results of operations or the financial position of the Company.

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 certain state departments of revenue for 2007 and prior years.

16. SHARE-BASED COMPENSATION AND OTHER BENEFITS

Share-Based Plans

The Company adopted the 2011 Incentive Compensation Plan (the "2011 Plan") in May 2011. In May 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, 2014, 3.5 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, 2014. 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, 2014, there are adequate authorized shares to satisfy anticipated award issuances in 2015.


130

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, 2014, 2013 and 2012.

Effect of Recognizing Share-based Compensation Expense
(Amounts in thousands)
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
Recognized share-based compensation expense:
 
 
 
 
 
Stock option expense
$
3,710

 
$
3,648

 
$
7,620

Restricted stock and unit expense (including salary stock)
10,562

 
8,802

 
13,035

Performance share unit expense
1,296

 
226

 
—

Total share-based compensation expense
15,568

 
12,676

 
20,655

Income tax benefit
(6,050
)
 
(4,818
)
 
(6,755
)
Share-based compensation expense, net of tax
$
9,518

 
$
7,858

 
$
13,900

Unrecognized share-based compensation expense:
 
 
 
 
 
Stock options
$
3,391

 
$
4,576

 
$
4,302

Weighted-average amortization period remaining (in years)
1.6

 
1.8

 
1.8

Restricted stock and unit expense
$
11,902

 
$
11,205

 
$
9,942

Weighted-average amortization period remaining (in years)
1.7

 
1.8

 
1.9

Performance share unit expense (1)
$
2,694

 
$
635

 
$
—

Weighted-average amortization period remaining (in years)
2.0

 
2.2

 
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, 2014 and 2013. For additional information regarding our performance share units, refer to the "Performance Share Units" section further in this Note.


131

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 generally vest ratably over three years from grant or at the end of that period based on continuous service and have a ten-year term. The following table summarizes stock option activity for the years ended December 31, 2014, 2013 and 2012.

Stock Option Activity
(Amounts in thousands, except per share data)
 
 
Options
 
Weighted-Average
 
Aggregate
Intrinsic
Value (2)
Exercise
Price
 
Remaining
Contractual
Life (1)
 
2012
 
 
 
 
 
 
 
Outstanding at beginning of year
3,627

 
$
26.15

 
 
 
 
Granted
646

 
14.43

 
 
 
 
Exercised
(95
)
 
9.59

 
 
 
 
Forfeited
(63
)
 
24.27

 
 
 
 
Expired
(240
)
 
29.94

 
 
 
 
Outstanding at end of year
3,875

 
$
24.40

 
6.1
 
$
1,381

Exercisable at end of year
2,829

 
$
28.05

 
5.1
 
$
541

2013
 
 
 
 
 
 
 
Outstanding at beginning of year
3,875

 
$
24.40

 
 
 
 
Granted
652

 
18.10

 
 
 
 
Exercised
(200
)
 
14.52

 
 
 
 
Forfeited
(86
)
 
17.43

 
 
 
 
Expired
(151
)
 
34.10

 
 
 
 
Outstanding at end of year
4,090

 
$
23.66

 
5.7
 
$
27,255

Exercisable at end of year
2,890

 
$
26.68

 
4.5
 
$
12,220

2014
 
 
 
 
 
 
 
Outstanding at beginning of year
4,090

 
$
23.66

 
 
 
 
Granted
203

 
27.98

 
 
 
 
Exercised
(277
)
 
18.59

 
 
 
 
Forfeited
(15
)
 
18.82

 
 
 
 
Expired
(132
)
 
34.09

 
 
 
 
Outstanding at end of year
3,869

 
$
23.92

 
5.0
 
$
38,163

Exercisable at end of year
2,853

 
$
25.55

 
3.9
 
$
23,879

Ending vested and expected to vest
3,771

 
$
23.98

 
4.9
 
$
36,999

(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.


132

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 - $14.91
 
583
 
6.7
 
$
13.98

 
398
 
$
13.79

$14.92 - $18.67
 
1,023
 
7.4
 
16.74

 
415
 
15.02

$18.68 - $26.37
 
908
 
3.0
 
25.98

 
887
 
26.09

$26.38 - $32.19
 
746
 
4.8
 
29.61

 
545
 
30.23

$32.20 - $46.51
 
609
 
2.8
 
35.43

 
608
 
35.43

Total
 
3,869
 
5.0
 
$
23.92

 
2,853
 
$
25.55

 
(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,
 
2014
 
2013
 
2012
Expected life of the option (in years)
6.0

 
5.4 - 6.3

 
4.6 - 5.6

Expected stock volatility
43.3 - 44.3%

 
44.0 - 45.2%

 
44.7 - 49.8%

Risk-free interest rate
1.8 - 2.1%

 
1.0 - 2.1%

 
1.6 - 2.4%

Expected dividend yield
0.1
%
 
0.1 - 0.2%

 
0.2 - 0.3%

Weighted-average fair value of options at their grant date
$
12.20

 
$
7.79

 
$
6.52


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,
 
2014
 
2013
 
2012
Total intrinsic value of stock options exercised
$
3,204

 
$
1,402

 
$
511

Cash received from stock options exercised
$
5,149

 
$
2,847

 
$
312

Income tax benefit realized from stock options exercised (1)
$
1,217

 
$
502

 
$
199

(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 except that certain dividends are subject to forfeiture under the terms of the grant. Awards granted prior to 2014 receive dividend payments at the same time as stockholders. Effective with awards granted in 2014, dividends accrued on restricted

133

stock are not paid out until shares vest and are distributed to the holders to the extent and at the same time the underlying shares are released from restrictions. The transfer restrictions generally lapse over a three year period and are contingent upon continued employment. We also issue restricted stock units which 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 monthly installments over a one-year period) and have the right to receive dividend equivalents at settlement, but no voting rights. Recipients of restricted share and unit awards do not pay to acquire the shares awarded. The fair value of restricted stock and units is based on our closing stock price on the date of grant. For certain restricted stock awards with post-vesting transferability restrictions and certain 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 24% in 2014, 21% in 2013 and 25% in 2012. The following table summarizes our restricted stock and unit activity for the years ended December 31, 2014, 2013 and 2012.

Restricted Stock and Unit Awards Activity
(Number of shares/units in thousands)
 
 
Year Ended December 31,
 
2014
 
2013
 
2012 (1)
 
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 restricted stock and unit awards at beginning of year
1,268

 
$
15.76

 
1,114

 
$
14.42

 
1,060

 
$
20.84

Granted
431

 
27.15

 
676

 
17.14

 
841

 
14.41

Vested
(577
)
 
15.62

 
(444
)
 
14.53

 
(733
)
 
23.37

Forfeited
(29
)
 
21.51

 
(78
)
 
15.70

 
(54
)
 
18.81

Nonvested restricted stock and unit awards at end of year
1,093

 
$
20.18

 
1,268

 
$
15.76

 
1,114

 
$
14.42

Vested, but not issued at end of year (3)
164

 
$
16.56

 
136

 
$
16.52

 
110

 
$
16.89

(1) 
Includes 49,992 shares of salary stock awards issued in connection with compensation restrictions under the TARP CPP at an average price of $15.51 per share. The salary stock was fully vested upon issuance with all of the rights of a stockholder, including the right to vote and receive dividends but was restricted from sale or transfer for a period of 36 months after issuance, except in the event of death or disability.
(2) 
Includes the effect of the DLOM.
(3) 
Represents restricted stock units with a delayed settlement date.

Other Restricted Stock and Unit Award Information
(Dollars in thousands)
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
Total fair value of vested/released restricted stock and units
$
16,135

 
$
7,662

 
$
10,674

Current income tax benefit realized from vesting/release of restricted stock and unit awards (1)
$
6,036

 
$
2,714

 
$
2,919

(1) 
Amount may be more or less than deferred tax benefit recorded during vesting period.

Performance Share Units

In 2013, we introduced performance share units ("PSUs") as part of our executive compensation program which entitles recipients to receive the underlying shares of common stock without payment subject to continued service and the Company's achievement of specified performance criteria over a three-year period. In 2014 we expanded the awards to a broader group of executives and added a relative total shareholder return ("TSR") factor to the award terms in addition to the achievement of specified performance criteria over a three-year period. 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 150% of target for the 2013 grants

134

and upward to a maximum of 200% for 2014 grants, 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, 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, 2014 and 2013.

Performance Share Units Activity (1) 
(Number of shares/units in thousands)
 
 
Year Ended December 31,
 
2014
 
2013
 
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
54

 
$
15.44

 
—

 
$
—

Granted
99

 
26.00

 
54

 
15.44

Forfeited
(3
)
 
26.00

 
—

 
—

Nonvested performance share unit awards at end of year
150

 
$
22.19

 
54

 
$
15.44

(1) 
Presented at target level of performance.
(2) 
Includes the effect of a 20% DLOM on awards granted in each 2014 and 2013.

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, at their option, 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. 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 2014, 2013 or 2012, 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,
 
2014
 
2013
 
2012
Company matching contribution
$
2,509

 
$
2,405

 
$
2,164

Number of Company shares held in KSOP
373

 
394

 
411

Fair value of Company shares held by KSOP
$
12,472

 
$
11,412

 
$
6,298

Dividends received
$
16

 
$
16

 
$
17



135

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 annual director’s fees. Participants elect at the time amounts 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, 2014 and 2013, there were 128,383 and 126,393 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.

17. 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 non-interest-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 $178.7 million and $123.4 million at December 31, 2014 and 2013, 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 2014, the Bank paid $100.0 million in dividends to the Parent Company. No dividends were paid by the Bank to the Parent Company during 2013. As of December 31, 2014, the Bank had the capacity under banking regulation to pay dividends of $534.8 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 capital ratio and the total capital ratio each as a percentage of risk-weighted assets and off-balance sheet items that have been weighted according to broad risk categories. These minimum ratios are shown in the table below.

To satisfy safety and soundness standards, banking institutions are expected to maintain capital levels in excess of the regulatory minimums depending on the risk inherent in the balance sheet, regulatory expectations and the changing risk profile of business activities and plans. 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, 2014, 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, 2014, 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.


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

Capital Measurements
(Amounts in thousands, except for ratios)
 
 
Actual
 
FRB Guidelines for
Minimum Regulatory
Capital
 
Regulatory Minimum
For "Well-Capitalized"
under FDICIA
 
Capital
 
Ratio
 
Capital
 
Ratio
 
Capital
 
Ratio
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
1,825,542

 
12.51
%
 
$
1,167,412

 
8.00
%
 
n/a

 
n/a

The PrivateBank
1,740,736

 
11.95

 
n/a

 
n/a

 
$
1,456,366

 
10.00
%
Tier 1 risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
1,530,579

 
10.49

 
583,706

 
4.00

 
n/a

 
n/a

The PrivateBank
1,570,773

 
10.79

 
n/a

 
n/a

 
873,820

 
6.00

Tier 1 leverage:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
1,530,579

 
9.96

 
614,996

 
4.00

 
n/a

 
n/a

The PrivateBank
1,570,773

 
10.24

 
n/a

 
n/a

 
767,278

 
5.00

As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
1,720,740

 
13.30
%
 
$
1,035,086

 
8.00
%
 
n/a

 
n/a

The PrivateBank
1,637,376

 
12.69

 
n/a

 
n/a

 
$
1,290,606

 
10.00
%
Tier 1 risk-based capital:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
1,433,920

 
11.08

 
517,543

 
4.00

 
n/a

 
n/a

The PrivateBank
1,475,958

 
11.44

 
n/a

 
n/a

 
774,363

 
6.00

Tier 1 leverage:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
1,433,920

 
10.37

 
552,839

 
4.00

 
n/a

 
n/a

The PrivateBank
1,475,958

 
10.70

 
n/a

 
n/a

 
689,432

 
5.00

n/a
Not applicable

In 2013, the FRB and other U.S. banking regulators adopted final rules that revise and replace the agencies' current regulatory capital requirements to align with the Basel III international capital standards and to implement certain changes required by the Dodd-Frank Act. The new rules require U.S. banks to hold higher amounts of capital, especially common equity, against their risk-weighted assets. The new capital requirements are higher in both quantity and quality of capital, with compliance required beginning January 1, 2015 (subject to a phase-in period). For additional information, see the "Recent Developments- Capital Requirements - Supervision and Regulation" section in Part I, Item 1 of this Form 10-K.

18. DERIVATIVE INSTRUMENTS

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

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

Derivatives expose us to counterparty credit risk. Credit risk is managed through our standard underwriting process. Actual exposures are monitored against various types of credit limits established to contain risk within parameters. Additionally, credit

137

risk is managed through the use of collateral, netting agreements, and the establishment of internal concentration limits by financial institution.

Notional Amounts and Fair Value of Derivative Instruments
(Amounts in thousands)
 
 
Asset Derivatives
 
Liability Derivatives
 
December 31, 2014
 
December 31, 2013
 
December 31, 2014
 
December 31, 2013
 
Notional (1)
 
Fair
Value
 
Notional (1)
 
Fair
Value
 
Notional (1)
 
Fair
Value
 
Notional (1)
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
550,000

 
$
4,542

 
$
350,000

 
$
4,005

 
$
250,000

 
$
2,715

 
$
325,000

 
$
9,748

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Client-related derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
3,881,202

 
$
42,879

 
$
3,959,328

 
$
54,155

 
$
3,743,827

 
$
43,792

 
$
3,959,328

 
$
54,930

Foreign exchange contracts
98,285

 
5,183

 
116,761

 
3,029

 
86,582

 
4,659

 
116,761

 
2,570

Credit contracts (1)
98,478

 
19

 
91,694

 
34

 
100,941

 
24

 
113,348

 
98

Total client-related derivatives
 
 
48,081

 
 
 
$
57,218

 
 
 
48,475

 
 
 
$
57,598

Other end-user derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
18,551

 
$
241

 
$
5,436

 
$
16

 
$
2,892

 
$
45

 
$
7,041

 
$
218

Mortgage banking derivatives
 
 
786

 
 
 
341

 
 
 
801

 
 
 
103

Total other end-user derivatives
 
 
$
1,027

 
 
 
$
357

 
 
 
$
846

 
 
 
$
321

Total derivatives not designated as hedging instruments
 
 
$
49,108

 
 
 
$
57,575

 
 
 
$
49,321

 
 
 
$
57,919

Netting adjustments (2)
 
 
(10,588
)
 
 
 
(13,158
)
 
 
 
(25,269
)
 
 
 
(18,777
)
Total derivatives
 
 
$
43,062

 
 
 
$
48,422

 
 
 
$
26,767

 
 
 
$
48,890

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

Master Netting Agreements

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

Derivative contracts may require 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, 2014. 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, 2014, $14.7 million of cash collateral pledged was netted with the related derivative liabilities and no cash collateral was received to net with the related derivative assets on the Consolidated Statement of Financial Condition. To the extent not netted against derivative fair values under a master netting agreement, the receivable for cash pledged is included in other short-term investments. There was no receivable for cash pledged at December 31, 2014. Any securities pledged to counterparties as financial instrument collateral remain on the Consolidated Statements of Financial Condition as long as we do not default.


138

The following table presents information about our derivative 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 derivative contracts with a given counterparty, the information presented below aggregates the derivative contracts entered into with the same counterparty.

Offsetting of Derivative Assets and Liabilities
(Amounts in thousands)

 
Gross Amounts of Recognized Assets / Liabilities (1)
 
Gross Amounts Offset (2)
 
Net Amount Presented on the Statement of Financial Condition
 
Gross Amounts Not Offset on the Statement of Financial Condition (3)
 
 
 
 
 
 
Financial Instruments (4) 
 
Cash Collateral
 
Net Amount
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
47,421

 
$
(7,433
)
 
$
39,988

 
$
—

 
$
—

 
$
39,988

Foreign exchange contracts
3,664

 
(3,154
)
 
510

 
—

 
—

 
510

Credit contracts
19

 
(1
)
 
18

 
—

 
—

 
18

Total derivatives subject to a master netting agreement
51,104

 
(10,588
)
 
40,516

 
—

 
—

 
40,516

Total derivatives not subject to a master netting agreement
2,546

 
—

 
2,546

 
—

 
—

 
2,546

Total derivatives
$
53,650

 
$
(10,588
)
 
$
43,062

 
$
—

 
$
—

 
$
43,062

Derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
46,507

 
$
(24,067
)
 
$
22,440

 
$
(17,755
)
 
$
—

 
$
4,685

Foreign exchange contracts
2,421

 
(1,202
)
 
1,219

 
(965
)
 
—

 
254

Credit contracts
24

 
—

 
24

 
(19
)
 
—

 
5

Total derivatives subject to a master netting agreement
48,952

 
(25,269
)
 
23,683

 
(18,739
)
 
—

 
4,944

Total derivatives not subject to a master netting agreement
3,084

 
—

 
3,084

 
—

 
—

 
3,084

Total derivatives
$
52,036

 
$
(25,269
)
 
$
26,767

 
$
(18,739
)
 
$
—

 
$
8,028

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


139

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

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

 
$
(12,371
)
 
$
45,789

 
$
—

 
$
—

 
$
45,789

Foreign exchange contracts
1,298

 
(767
)
 
531

 
—

 
—

 
531

Credit contracts
34

 
(20
)
 
14

 
—

 
—

 
14

Total derivatives subject to a master netting agreement
59,492

 
(13,158
)
 
46,334

 
—

 
—

 
46,334

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

 
—

 
2,088

 
—

 
—

 
2,088

Total derivatives
$
61,580

 
$
(13,158
)
 
$
48,422

 
$
—

 
$
—

 
$
48,422

Derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
64,678

 
$
(17,990
)
 
$
46,688

 
$
(41,192
)
 
$
—

 
$
5,496

Foreign exchange contracts
2,462

 
(767
)
 
1,695

 
(1,495
)
 
—

 
200

Credit contracts
98

 
(20
)
 
78

 
(69
)
 
—

 
9

Total derivatives subject to a master netting agreement
67,238

 
(18,777
)
 
48,461

 
(42,756
)
 
—

 
5,705

Total derivatives not subject to a master netting agreement
429

 
—

 
429

 
—

 
—

 
429

Total derivatives
$
67,667

 
$
(18,777
)
 
$
48,890

 
$
(42,756
)
 
$
—

 
$
6,134

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

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

Derivatives Subject to Credit Risk Contingency Features
(Amounts in thousands)
 
 
December 31,
 
2014
 
2013
Fair value of derivatives with credit contingency features in a net liability position
$
14,596

 
$
28,152

Collateral posted for those transactions in a net liability position
$
16,865

 
$
30,272

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

 
$
—

Outstanding derivative instruments that would be immediately settled
$
14,596

 
$
28,152


140


Derivatives Designated in Hedge Relationships

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

Cash Flow Hedges – Under our cash flow hedging program we enter into receive fixed/pay variable interest rate swaps to convert certain floating-rate commercial loans to fixed-rate to reduce the variability in forecasted interest cash flows due to market interest rate changes. We use regression analysis to assess the effectiveness of cash flow hedges at both the inception of the hedge relationship and on an ongoing basis. Ineffectiveness is generally measured as the amount by which the cumulative change in fair value of the hedging instrument exceeds the present value of the cumulative change in the expected cash flows of the hedged item. Measured ineffectiveness is recognized directly in other non-interest income in the Consolidated Statements of Income. During the year ended December 31, 2014, there were no gains or losses from cash flow hedge derivatives related to ineffectiveness that were reclassified to current earnings. The effective portion of the gains or losses on cash flow hedges are recorded, net of tax, in accumulated other comprehensive income ("AOCI") and are subsequently reclassified to interest income on loans in the period that the hedged interest cash flows affect earnings. As of December 31, 2014, the maximum length of time over which forecasted interest cash flows are hedged is five years. There are no components of derivative gains or losses excluded from the assessment of hedge effectiveness related to our cash flow hedge strategy.

Change in Accumulated Other Comprehensive Income
Related to Interest Rate Swaps Designated as Cash Flow Hedge
(Amounts in thousands)

 
Year Ended December 31,
 
2014
 
2013
 
Pre-tax
 
After-tax
 
Pre-tax
 
After-tax
Accumulated unrealized (loss) gain at beginning of year
$
(5,110
)
 
$
(3,116
)
 
$
9,603

 
$
5,845

Amount of gain (loss) recognized in AOCI (effective portion)
16,777

 
10,201

 
(8,729
)
 
(5,339
)
Amount reclassified from AOCI to interest income on loans
(9,262
)
 
(5,616
)
 
(5,984
)
 
(3,622
)
Accumulated unrealized gain (loss) at end of year
$
2,405

 
$
1,469

 
$
(5,110
)
 
$
(3,116
)

As of December 31, 2014, $5.3 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, 2014. During the year ended December 31, 2014, there were no gains or losses from cash flow hedge derivatives reclassified to current earnings because it became probable that the original forecasted transaction would not occur.

Derivatives Not Designated in Hedge Relationships

Other End-User Derivatives – We enter into derivatives that include commitments to fund residential mortgage loans to be sold into the secondary market and forward commitments for the future delivery of residential mortgage loans. It is our practice to enter into forward commitments for the future delivery of residential mortgage loans when we enter into customer interest rate lock commitments. This practice allows us to economically hedge the effect of changes in interest rates on our commitments to fund the loans as well as on our portfolio of mortgage loans held-for-sale. At December 31, 2014, the par value of our mortgage loans held-for-sale totaled $42.2 million, the notional value of our interest rate lock commitments totaled $44.7 million, and the notional value of our forward commitments for the future delivery of residential mortgage loans totaled $86.9 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, 2014, our exposure was to the Euro, Canadian dollar, British pound and Danish Kroner on $16.2 million of loans. We manage this risk using forward currency derivatives.

Client-Related Derivatives – We offer, through our capital markets group, over-the-counter interest rate and foreign exchange derivatives to our clients, including but not limited to, interest rate swaps, interest rate options (also referred to as caps, floors, collars, etc.), foreign exchange forwards and options, as well as cash products such as foreign exchange spot transactions. When our clients enter into an interest rate or foreign exchange derivative transaction with us, we mitigate our exposure to market risk through the execution of off-setting positions with inter-bank dealer counterparties. Although the off-setting nature of transactions

141

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,
 
2014
 
2013
Fair value of written RPAs
$
24

 
$
98

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

 
Less than 1 to 4

Range of assigned internal risk ratings
2 to 7

 
2 to 7

Maximum potential amount of future undiscounted payments
$
3,927

 
$
3,263

Percent of maximum potential amount of future undiscounted payments covered by proceeds from liquidation of pledged collateral
25
%
 
16
%

Gain (Loss) Recognized on Derivative Instruments
Not Designated in Hedging Relationship
(Amounts in thousands)
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
Gain on client-related derivatives recognized in capital markets products income:
 
 
 
 
 
Interest rate contracts
$
10,634

 
$
14,226

 
$
19,613

Foreign exchange contracts
7,068

 
6,506

 
6,024

Credit contracts
345

 
(4
)
 
321

Total client-related derivatives
18,047

 
20,728

 
25,958

Gain (loss) on end-user derivatives recognized in other income:
 
 
 
 
 
Foreign exchange derivatives
1,402

 
125

 
(336
)
Mortgage banking derivatives
(253
)
 
235

 
123

Total end-user derivatives
1,149

 
360

 
(213
)
Total gain recognized on derivatives not designated in hedging relationship
$
19,196

 
$
21,088

 
$
25,745



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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.

Contractual or Notional Amounts of Financial Instruments (1) 
(Amounts in thousands)
 
 
December 31,
 
2014
 
2013
Commitments to extend credit:
 
 
 
Home equity lines
$
129,943

 
$
139,116

Residential 1-4 family construction
53,847

 
32,714

Commercial real estate, other construction, and land development
1,123,123

 
703,382

Commercial and industrial
4,255,422

 
3,609,443

All other commitments
336,623

 
222,337

Total commitments to extend credit
$
5,898,958

 
$
4,706,992

Letters of credit:
 
 
 
Financial standby
$
334,175

 
$
308,577

Performance standby
38,167

 
26,932

Commercial letters of credit
5,224

 
4,500

Total letters of credit
$
377,566

 
$
340,009

(1) 
Includes covered loan commitments of $11.0 million and $18.7 million as of December 31, 2014 and 2013, respectively.

Commitments to extend credit are agreements to lend funds to a client as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and variable interest rates tied to the prime rate or LIBOR and may require payment of a fee for the unused portion of the commitment or for the amounts issued but not drawn on letters of credit. All or a portion of commitments with an initial term extending beyond one year require regulatory capital support, while commitments of less than one year do not, although under newly issued regulatory capital rules, unfunded commitments of less than one year will require regulatory capital unless unconditionally cancellable. Since many of our commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements of the borrowers. As of December 31, 2014, we had a reserve for unfunded commitments of $12.3 million, which reflects our estimate of inherent losses associated with these commitment obligations. The balance of this reserve changes based on a number of factors including: the balance of outstanding commitments and our assessment of the likelihood of borrowers to utilize these commitments. The reserve is recorded in other liabilities in the Consolidated Statements of Financial Condition.

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

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

143

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 $1.4 million as of December 31, 2014. We amortize these amounts into income over the commitment period. As of December 31, 2014, standby letters of credit had a remaining weighted-average term of approximately 14 months, with remaining actual lives ranging from less than 1 year to 6 years.

Other Commitments

The Company has unfunded commitments to CRA investments and other investment partnerships totaling $21.6 million at December 31, 2014. Of these commitments, $8.9 million related to legally-binding unfunded commitments for tax-credit investments and was included within other assets and other liabilities on the Consolidated Statements of Financial Condition.

Credit Card Settlement Guarantees

Our third-party corporate credit card vendor issues corporate purchase credit cards on behalf of our commercial clients. The corporate purchase credit cards are issued to employees of certain of our commercial clients at the client’s direction and used for payment of business-related expenses. In most circumstances, these cards will be underwritten by our third-party vendor. However, in certain circumstances, we may enter into a recourse agreement, which transfers the credit risk from the third-party vendor to us in the event that the client fails to meet its financial payment obligation. In these circumstances, a total maximum exposure amount is established for our corporate client. In addition to the obligations presented in the prior table, the maximum potential future payments guaranteed by us under this third-party settlement guarantee were $11.5 million at December 31, 2014.

We believe that the estimated amounts of maximum potential future payments are not representative of our actual potential loss given our insignificant historical losses from this third-party settlement guarantee program. As of December 31, 2014, we have no recorded contingent liability in the consolidated financial statements for this settlement guarantee program, and management believes that the probability of any loss under this arrangement is remote.

Mortgage Loans Sold with Recourse

Certain mortgage loans sold have limited recourse provisions. The losses for the years ended December 31, 2014 and 2013 arising from limited recourse provisions were not material. Based on this experience, the Company has not established any liability for potential future losses relating to mortgage loans sold in prior periods.

Legal Proceedings

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

As of December 31, 2014, there were various other legal proceedings pending against the Company and its subsidiaries in the ordinary course of business. Management does not believe that the outcome of these proceedings will have, individually or in the aggregate, a material adverse effect on the Company’s results of operations, financial condition or cash flows.

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.


144

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

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

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

Valuation Methodology

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

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

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

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

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

145

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

At the time a collateral-dependent loan is initially determined to be impaired, we review the existing collateral appraisal. If the most recent appraisal is greater than one-year old, a new appraisal of the underlying collateral is obtained. The majority of collateral-dependent impaired loans are secured by real estate for which we generally obtain "as is" appraisal values in order 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.

Derivative Assets and Derivative Liabilities – Derivative instruments with positive fair values are reported as an asset and derivative instruments with negative fair value are reported as liabilities, in both cases after taking into account the effects of master netting agreements. For derivative counterparties with which we have a master netting agreement, we measure nonperformance risk on the basis of our net exposure to the counterparty. The fair value of derivative assets and liabilities is determined based on prices obtained from third party advisors using standardized industry models. Many factors affect derivative values, including the level of interest rates, the market’s perception of our nonperformance risk as reflected in our credit spread, and our assessment of counterparty nonperformance risk. The nonperformance risk assessment is based on our evaluation of credit risk, or if available, on observable external assessments of credit risk. Values of derivative assets and liabilities are primarily based on observable inputs and are classified in level 2 of the valuation hierarchy, with the exception of certain client-related derivatives and risk participation agreements, as discussed below. On a quarterly basis, the Company uses a variety of methods to validate the overall reasonableness of the fair values obtained from third party advisors, including evaluating inputs and methodologies used by the third party advisors, comparing prices obtained to prices received from other pricing sources, and reviewing the reasonableness of prices based on the Company's knowledge of market liquidity and other market-related conditions. While we may challenge valuation inputs used in determining prices obtained from third party advisors based on our validation procedures, during the years ended December 31, 2014 and 2013, we did not alter the fair values ultimately provided by the third party advisors.

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

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are derived and aligned with the loss factors utilized in the calculation of the Company’s general reserve component of the allowance for loan losses. Changes in the fair value measurement of risk participation agreements and watch list derivatives are largely due to changes in the fair value of the derivative, risk rating adjustments and fluctuations in the pertinent historic average loss rate.

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, 2014 and 2013 on a recurring basis.

Fair Value Measurements on a Recurring Basis
(Amounts in thousands)
 
 
December 31, 2014
 
December 31, 2013
 
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
268,265

 
$
—

 
$
—

 
$
268,265

 
$
142,575

 
$
—

 
$
—

 
$
142,575

U.S. Agencies
—

 
46,258

 
—

 
46,258

 
—

 
45,528

 
—

 
45,528

Collateralized mortgage obligations
—

 
136,933

 
—

 
136,933

 
—

 
176,116

 
—

 
176,116

Residential mortgage-backed securities
—

 
846,078

 
—

 
846,078

 
—

 
963,107

 
—

 
963,107

State and municipal securities
—

 
347,310

 
—

 
347,310

 
—

 
274,650

 
—

 
274,650

Foreign sovereign debt
—

 
500

 
—

 
500

 
—

 
500

 
—

 
500

Total securities available-for-sale
268,265

 
1,377,079

 
—

 
1,645,344

 
142,575

 
1,459,901

 
—

 
1,602,476

Mortgage loans held-for-sale
—

 
42,215

 
—

 
42,215

 
—

 
17,619

 
—

 
17,619

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

 
4,542

 
—

 
4,542

 
—

 
4,005

 
—

 
4,005

Client-related derivatives
—

 
46,669

 
1,412

 
48,081

 
—

 
56,770

 
448

 
57,218

Other end-user derivatives
—

 
1,027

 
—

 
1,027

 
—

 
357

 
—

 
357

Netting adjustments
—

 
(9,952
)
 
(636
)
 
(10,588
)
 
—

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

 
42,286

 
776

 
43,062

 
—

 
47,994

 
428

 
48,422

Total assets
$
268,265

 
$
1,461,580

 
$
776

 
$
1,730,621

 
$
142,575

 
$
1,525,514

 
$
428

 
$
1,668,517

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

 
$
2,715

 
$
—

 
$
2,715

 
$
—

 
$
9,748

 
$
—

 
$
9,748

Client-related derivatives
—

 
47,799

 
676

 
48,475

 
—

 
57,500

 
98

 
57,598

Other end-user derivatives
—

 
846

 
—

 
846

 
—

 
321

 
—

 
321

Netting adjustments
—

 
(24,633
)
 
(636
)
 
(25,269
)
 
—

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

 
$
26,727

 
$
40

 
$
26,767

 
$
—

 
$
48,812

 
$
78

 
$
48,890

 


147

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

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

Reconciliation of Beginning and Ending Fair Value for Those
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (1) 
(Amounts in thousands)
 
 
December 31, 2014
 
December 31, 2013
 
 Derivative Assets
 
 Derivative (Liabilities)
 
 Derivative Assets
 
 Derivative (Liabilities)
Balance at beginning of year
$
448

 
$
(98
)
 
$
1,023

 
$
(60
)
Total gains (losses):
 
 
 
 
 
 
 
Included in earnings (2)
455

 
660

 
126

 
(14
)
Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 
Issuances
—

 
—

 
—

 
(51
)
Settlements
(1,487
)
 
(24
)
 
(841
)
 
—

Transfers into Level 3 (out of Level 2) (3)
2,717

 
(1,411
)
 
575

 
—

Transfers out of Level 3 (into Level 2) (3)
(721
)
 
197

 
(435
)
 
27

Balance at end of year
$
1,412

 
$
(676
)
 
$
448

 
$
(98
)
Change in unrealized gains (losses) in earnings relating to assets and liabilities still held at end of year
$
353

 
$
102

 
$
(19
)
 
$
(21
)
 
(1) 
Fair value is presented prior to giving effect to netting adjustments.
(2) 
Amounts disclosed in this line are included in the Consolidated Statements of Income as capital markets products income for derivatives.
(3) 
Transfers in and transfers out are recognized at the end of each quarterly reporting period. In general, derivative assets and liabilities are transferred into Level 3 from Level 2 due to a lack of observable market data, as there was deterioration in the credit risk of the derivative counterparty. Conversely, derivative assets and liabilities are transferred out of Level 3 into Level 2 due to an improvement in the credit risk of the derivative counterparty.

Financial Instruments Recorded Using the Fair Value Option

Difference Between Aggregate Fair Value and Aggregate Remaining Principal Balance
for Mortgage Loans Held-For-Sale Elected to be Carried at Fair Value
(Amounts in thousands)
 
 
December 31,
 
2014
 
2013
Aggregate fair value
$
42,215

 
$
17,619

Difference (1)
(16
)
 
238

Aggregate unpaid principal balance
$
42,199

 
$
17,857

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

As of December 31, 2014, none of the mortgage loans held-for-sale were on nonaccrual or 90 days or more past due and still accruing interest. Changes in fair value due to instrument-specific credit risk for the year ended December 31, 2014 were not material.


148

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, 2014 and 2013 and still held at December 31, 2014 and 2013, respectively. All fair value measurements on a nonrecurring basis were measured using level 3 of the valuation hierarchy.

Fair Value Measurements on a Nonrecurring Basis
(Amounts in thousands)
 
 
Fair Value
 
Losses
 
December 31,
 
For the Year Ended
 
2014
 
2013
 
2014
 
2013
Collateral-dependent impaired loans (1)
$
34,192

 
$
45,937

 
$
5,440

 
$
4,656

Covered assets - OREO (2) (3)
143

 
6,044

 
5

 
532

OREO (2)
8,657

 
18,764

 
5,817

 
12,711

Total
$
42,992

 
$
70,745

 
$
11,262

 
$
17,899

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

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

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,
2014
 
Valuation Technique(s)
 
Unobservable
Input
 
Range
 
Weighted
Average
 
Watch list derivatives
$
741

 
Discounted cash flow
 
Loss factors
 
4.3% to 16.0%
 
15.4
 %
 
Risk participation agreements
$
(5
)
(1) 
Discounted cash flow
 
Loss factors
 
0.6% to 16.0%
 
4.7
 %
 
Collateral-dependent impaired loans
$
34,192

 
Sales comparison,
income capitalization
and/or cost approach
 
Property specific
adjustment
 
-1.2% to -34.7%
 
-21.9
 %
(2)  
OREO
$
8,657

 
Sales comparison,
income capitalization
and/or cost approach
 
Property specific
adjustment
 
-0.1% to -100.0%
 
-19.1
 %
(2)  
(1) 
Represents fair value of underlying swap.
(2) 
Weighted average is calculated based on assets with a property specific adjustment.

149


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

Estimated Fair Value of Certain Financial Instruments

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

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

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

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

Other loans held-for-sale - Included in loans held-for-sale at December 31, 2014 are $36.6 million of loans carried at the lower of aggregate cost or fair value and $36.3 million of loans held-for-sale in connection with the pending sale of the Company's banking office located in Norcross, Georgia, which closed in January 2015. Fair value estimates are based on the actual agreed upon price in the agreement.

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

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

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

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

150


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

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

Deposits held-for-sale – Deposits held-for-sale are recorded at the lower of cost or fair value. Amounts held at December 31, 2014 are deposits held-for-sale in connection with the pending sale of the Company's banking office located in Norcross, Georgia. Fair value estimates are based upon the price and premium per the agreement.

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

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

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

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


151

Financial Instruments
(Amounts in thousands)
 
 
As of December 31, 2014
 
Carrying Amount
 
 
 
Fair Value Measurements Using
 
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
132,211

 
$
132,211

 
$
132,211

 
$
—

 
$
—

Federal funds sold and interest-bearing deposits in banks
292,341

 
292,341

 
—

 
292,341

 
—

Loans held-for-sale
115,161

 
115,161

 
—

 
115,161

 
—

Securities available-for-sale
1,645,344

 
1,645,344

 
268,265

 
1,377,079

 
—

Securities held-to-maturity
1,129,285

 
1,132,615

 
—

 
1,132,615

 
—

FHLB stock
28,666

 
28,666

 
—

 
28,666

 
—

Loans, net of allowance for loan losses and unearned fees
11,739,721

 
11,736,461

 
—

 
—

 
11,736,461

Covered assets, net of allowance for covered loan losses
28,941

 
33,988

 
—

 
—

 
33,988

Accrued interest receivable
40,531

 
40,531

 
—

 
—

 
40,531

Investment in BOLI
55,207

 
55,207

 
—

 
—

 
55,207

Derivative assets
43,062

 
43,062

 
—

 
42,286

 
776

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
13,089,968

 
$
13,095,657

 
$
—

 
$
10,595,040

 
$
2,500,617

Deposits held-for-sale
122,216

 
117,572

 
 
 
117,572

 
 
Short-term and other borrowings
432,385

 
430,944

 
—

 
427,150

 
3,794

Long-term debt
344,788

 
332,374

 
204,320

 
54,092

 
73,962

Accrued interest payable
6,948

 
6,948

 
—

 
—

 
6,948

Derivative liabilities
26,767

 
26,767

 
—

 
26,727

 
40



152

Financial Instruments (Continued)
(Amounts in thousands)

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

 
$
133,518

 
$
133,518

 
$
—

 
$
—

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

 
306,544

 
—

 
306,544

 
—

Loans held-for-sale
26,816

 
26,816

 
—

 
26,816

 
—

Securities available-for-sale
1,602,476

 
1,602,476

 
142,575

 
1,459,901

 
—

Securities held-to-maturity
921,436

 
896,908

 
—

 
896,908

 
—

FHLB stock
30,005

 
30,005

 
—

 
30,005

 
—

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

 
10,484,250

 
—

 
—

 
10,484,250

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

 
113,593

 
—

 
—

 
113,593

Accrued interest receivable
37,004

 
37,004

 
—

 
—

 
37,004

Investment in BOLI
53,865

 
53,865

 
—

 
—

 
53,865

Derivative assets
48,422

 
48,422

 
—

 
47,994

 
428

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
12,013,641

 
$
12,024,079

 
$
—

 
$
9,443,094

 
$
2,580,985

Short-term borrowings
8,400

 
8,513

 
—

 
2,060

 
6,453

Long-term debt
627,793

 
598,260

 
267,360

 
256,825

 
74,075

Accrued interest payable
6,326

 
6,326

 
—

 
—

 
6,326

Derivatives liabilities
48,890

 
48,890

 
—

 
48,812

 
78


21. OPERATING SEGMENTS

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

The accounting policies of the individual operating segments are the same as those of the Company as described in Note 1. Transactions between operating segments are primarily conducted at fair value, resulting in profits that are eliminated from consolidated results of operations.


153

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)
 
Year Ended December 31,
Banking
 
Asset Management
 
Holding Company
and Other
Adjustments (1)
 
Consolidated
2014
 
 
 
 
 
 
 
Net interest income (loss)
$
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

 
$
—

 
$
1,720,577

 
$
15,603,382

Total loans
11,892,219

 
—

 
—

 
11,892,219

Deposits, excluding deposits held-for-sale
13,150,600

 
—

 
(60,632
)
 
13,089,968

2013
 
 
 
 
 
 
 
Net interest income (loss)
$
446,556

 
$
3,326

 
$
(28,819
)
 
$
421,063

Provision for loan and covered loan losses
31,796

 
—

 
—

 
31,796

Non-interest income
95,344

 
18,387

 
259

 
113,990

Non-interest expense
271,911

 
17,832

 
13,571

 
303,314

Income (loss) before income taxes
238,193

 
3,881

 
(42,131
)
 
199,943

Income tax provision (benefit)
91,402

 
1,532

 
(15,940
)
 
76,994

Net income (loss)
$
146,791

 
$
2,349

 
$
(26,191
)
 
$
122,949

Assets
$
12,465,063

 
$
—

 
$
1,620,683

 
$
14,085,746

Total loans
10,644,021

 
—

 
—

 
10,644,021

Deposits
12,069,583

 
—

 
(55,942
)
 
12,013,641

2012
 
 
 
 
 
 
 
Net interest income (loss)
$
438,406

 
$
3,067

 
$
(21,540
)
 
$
419,933

Provision for loan and covered loan losses
71,425

 
—

 
—

 
71,425

Non-interest income
93,943

 
17,018

 
80

 
111,041

Non-interest expense
285,272

 
17,386

 
24,474

 
327,132

Income (loss) before income taxes
175,652

 
2,699

 
(45,934
)
 
132,417

Income tax provision (benefit)
67,578

 
1,064

 
(14,121
)
 
54,521

Net income (loss)
$
108,074

 
$
1,635

 
$
(31,813
)
 
$
77,896

Assets
$
12,552,897

 
$
—

 
$
1,504,618

 
$
14,057,515

Total loans
10,139,982

 
—

 
—

 
10,139,982

Deposits
12,251,614

 
—

 
(77,980
)
 
12,173,634

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


154

22. VARIABLE INTEREST ENTITIES

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

Nonconsolidated VIEs
(Amounts in thousands)
 
 
December 31, 2014
 
December 31, 2013
 
Carrying
Amount
 
Maximum
Exposure
to Loss
 
Carrying
Amount
 
Maximum
Exposure
to Loss
Trust preferred capital securities issuances
$
169,788

 
$
—

 
$
244,793

 
$
—

Community reinvestment investments
14,360

 
16,054

 
7,889

 
9,813

Restructured loans to commercial clients (1):
 
 
 
 
 
 
 
Outstanding loan balance
49,376

 
57,782

 
43,481

 
48,975

Related derivative asset
6,533

 
6,533

 
—

 
—

Total
$
240,057

 
$
80,369

 
$
296,163

 
$
58,788

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

Trust preferred capital securities issuances – As discussed in Note 12, we sponsor and wholly own 100% of the common equity of four trusts that were formed for the purpose of issuing trust preferred securities to third-party investors and investing the proceeds from the sale of the trust preferred securities solely in debentures issued by the Company. The trusts’ only assets are the principal balance of the Debentures and the related interest receivable, which are included within long-term debt in our Consolidated Statements of Financial Condition. The Company is not the primary beneficiary of the trusts and accordingly, the trusts are not consolidated in our financial statements.

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

A portion of our community reinvestment investments are investments in limited liability entities that invest in affordable housing projects that qualify for low-income housing tax credits. These investments entitle the Company to tax credits through 2031. As described in Note 2, "Recently Adopted Accounting Pronouncements," as of January 1, 2014, the Company adopted new guidance that permits the Company to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Prior to adoption of this guidance, the Company accounted for all of its investments in qualified affordable housing projects using the effective yield method. As permitted under the new guidance, the Company has elected to continue accounting for preexisting tax credit investments using the effective yield method. Any new investments in qualified affordable housing projects entered into on or after January 1, 2014 that meet certain conditions will be accounted for using the proportional amortization method. As of December 31, 2014, the carrying value of the investments in qualified affordable housing projects that will be accounted for using the proportional amortization method totaled $7.5 million.

The carrying value of the Company’s tax credit investments totaled $10.0 million and $3.0 million as of December 31, 2014 and 2013, respectively. The Company recognizes tax credits related to these investments, tax benefits from the operating losses generated by these investments, and amortization of the principal investment balances, all of which were immaterial during each of the years ended December 31, 2014 and 2013. Commitments to provide future capital contributions totaling $8.9 million as of December 31, 2014, are expected to be paid through 2029. These investments are reviewed periodically for impairment. No impairment losses have been recorded for the years ended December 31, 2014 and 2013.

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

155

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,
 
2014
 
2013
Assets
 
 
 
Cash and interest-bearing deposits
$
60,632

 
$
55,942

Investment in and advances to subsidiaries
1,694,699

 
1,591,778

Other assets
25,879

 
28,904

Total assets
$
1,781,210

 
$
1,676,624

Liabilities and Equity
 
 
 
Long-term debt
$
294,788

 
$
369,793

Accrued expenses and other liabilities
4,743

 
4,927

Equity
1,481,679

 
1,301,904

Total liabilities and equity
$
1,781,210

 
$
1,676,624



156

Statements of Income
(Parent Company only)
(Amounts in thousands)
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
Income
 
 
 
 
 
Dividends from subsidiaries
$
100,000

 
$
—

 
$
—

Interest income
3

 
3

 
11

Securities transactions and other income
60

 
259

 
80

Total income
100,063

 
262

 
91

Expenses
 
 
 
 
 
Interest expense
26,348

 
25,493

 
18,471

Salaries and employee benefits
5,672

 
8,235

 
19,721

Other expenses
5,123

 
5,336

 
4,754

Total expenses
37,143

 
39,064

 
42,946

Income (loss) before income taxes and equity in undistributed income of subsidiaries
62,920

 
(38,802
)
 
(42,855
)
Income tax benefit
14,242

 
14,627

 
12,908

Income (loss) before undistributed income of subsidiaries
77,162

 
(24,175
)
 
(29,947
)
Equity in undistributed income of subsidiaries
75,917

 
147,124

 
107,843

Net income
153,079

 
122,949

 
77,896

Preferred stock dividend
—

 
—

 
13,368

Net income available to common stockholders
$
153,079

 
$
122,949

 
$
64,528



157

Statements of Cash Flows
(Parent Company only)
(Amounts in thousands)
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
Operating Activities
 
 
 
 
 
Net income
$
153,079

 
$
122,949

 
$
77,896

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
 
Equity in undistributed income from subsidiaries
(75,917
)
 
(147,124
)
 
(107,843
)
Share-based compensation expense
2,072

 
4,366

 
16,453

Depreciation of premises, furniture and equipment
43

 
139

 
259

Excess tax benefit from exercise of stock options and vesting of restricted shares
(1,147
)
 
(425
)
 
(118
)
Net decrease in other assets
3,484

 
1,011

 
5,574

Net (decrease) increase in other liabilities
(209
)
 
(714
)
 
661

Net cash provided by (used in) operating activities
81,405

 
(19,798
)
 
(7,118
)
Investing Activities
—

 
—

 
—

Financing Activities
 
 
 
 
 
Proceeds from the issuance of long-term debt
—

 
—

 
125,000

Payments for the redemption of preferred stock
—

 
—

 
(243,815
)
Payments for the redemption of common stock warrant
—

 
—

 
(1,225
)
Net proceeds from the issuance of common stock
—

 
—

 
70,657

Repayment of long-term debt
(75,005
)
 
—

 
—

Stock repurchased in connection with benefit plans
(5,330
)
 
(2,522
)
 
(2,696
)
Cash dividends paid
(3,125
)
 
(3,119
)
 
(13,082
)
Proceeds from exercise of stock options and issuance of common stock under benefit plans
5,598

 
2,976

 
479

Excess tax benefit from exercise of stock options and vesting of restricted shares
1,147

 
425

 
118

Net cash used in financing activities
(76,715
)
 
(2,240
)
 
(64,564
)
Net increase (decrease) in cash and cash equivalents
4,690

 
(22,038
)
 
(71,682
)
Cash and cash equivalents at beginning of year
55,942

 
77,980

 
149,662

Cash and cash equivalents at end of year
$
60,632

 
$
55,942

 
$
77,980



158

24. QUARTERLY EARNINGS PERFORMANCE (UNAUDITED)

Quarterly Earnings Performance (1) 
(Dollars in thousands, except per share data)

 
2014
 
2013
 
Fourth
 
Third
 
Second
 
First
 
Fourth
 
Third
 
Second
 
First
Interest income
$
135,978

 
$
134,300

 
$
128,951

 
$
125,158

 
$
125,620

 
$
123,577

 
$
121,632

 
$
121,409

Interest expense
19,102

 
17,542

 
16,600

 
16,406

 
17,164

 
17,742

 
17,900

 
18,369

Net interest income
116,876

 
116,758

 
112,351

 
108,752

 
108,456

 
105,835

 
103,732

 
103,040

Provision for loan and covered loan losses
4,120

 
3,890

 
327

 
3,707

 
4,476

 
8,120

 
8,843

 
10,357

Fee revenue
30,426

 
30,666

 
30,063

 
25,905

 
26,461

 
27,655

 
28,873

 
29,827

Net securities gains
—

 
3

 
196

 
331

 
279

 
118

 
136

 
641

Non-interest expense
83,025

 
77,836

 
75,465

 
75,750

 
75,827

 
71,269

 
77,255

 
78,963

Income before income taxes
60,157

 
65,701

 
66,818

 
55,531

 
54,893

 
54,219

 
46,643

 
44,188

Income tax provision
22,934

 
25,174

 
25,994

 
21,026

 
21,187

 
21,161

 
17,728

 
16,918

Net income
$
37,223

 
$
40,527

 
$
40,824

 
$
34,505

 
$
33,706

 
$
33,058

 
$
28,915

 
$
27,270

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.48

 
$
0.52

 
$
0.52

 
$
0.44

 
$
0.43

 
$
0.42

 
$
0.37

 
$
0.35

Diluted earnings per share
$
0.47

 
$
0.51

 
$
0.52

 
$
0.44

 
$
0.43

 
$
0.42

 
$
0.37

 
$
0.35

Return on average common equity
10.03
%
 
11.27
%
 
11.88
%
 
10.48
%
 
10.28
%
 
10.43
%
 
9.28
%
 
9.01
%
Return on average assets
0.95
%
 
1.09
%
 
1.14
%
 
1.00
%
 
0.96
%
 
0.96
%
 
0.86
%
 
0.81
%
Net interest margin – tax-equivalent
3.07
%
 
3.23
%
 
3.21
%
 
3.23
%
 
3.18
%
 
3.18
%
 
3.22
%
 
3.19
%
(1) 
All ratios are presented on an annualized basis.

25. SUBSEQUENT EVENTS

In fourth quarter 2014, we entered into a purchase and assumption agreement to sell our banking office in Norcross, Georgia. The transaction included the sale of certain deposits and loans made to retail and small business banking clients, which at December 31, 2014 totaled $122.2 million of deposits and $36.3 million of loans, each classified as held-for-sale. On January 20, 2015, we completed the sale and as a result recognized a gain of $4.3 million on the transaction, with $4.0 million of the gain recognized in the first quarter 2015. At consummation of the transaction, the amount of deposits and loans sold totaled $106.9 million and $36.7 million, respectively.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.


159

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, 2014 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.

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, 2014. 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, 2014 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, 2014. That report, which expresses an unqualified opinion on the Company’s internal control over financial reporting as of December 31, 2014, is included in this Item under the heading "Attestation Report of Independent Registered Public Accounting Firm."

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, 2014, 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

160

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, 2014, 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, 2014 and December 31, 2013, 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, 2014, of the Company and our report dated March 2, 2015, expressed an unqualified opinion thereon.

/S/ ERNST & YOUNG LLP

March 2, 2015
Chicago, Illinois

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 1of this Form 10-K and the information included therein is incorporated herein by reference.

Information regarding our directors will be included in our Proxy Statement to be filed for our 2015 Annual Meeting of Stockholders (the "Proxy Statement") under the heading "Election of Directors" and the information to be included therein is incorporated herein by reference.

Information regarding our directors’ and executive officers’ compliance with Section 16(a) of the Exchange Act will be included in the Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" and the information to be included therein is incorporated herein by reference.

Information regarding the Corporate Governance Committee of our Board of Directors and the procedures by which our stockholders may recommend nominees to our Board of Directors, and information regarding the Audit Committee of our Board of Directors and its "audit committee financial expert," will be included in the Proxy Statement under the heading "Corporate Governance" and the information to be included therein is incorporated herein by reference.

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 and Chief Financial Officer, 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 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

Information regarding compensation of our executive officers and directors will be included in the Proxy Statement under the headings "Compensation Discussion and Analysis," "Executive Compensation," and "Director Compensation" and the information to be included therein is incorporated herein by reference.

161


The information required by this item regarding Compensation Committee Interlocks and Insider Participation is included under the heading "Executive Compensation – Compensation Committee Interlocks and Insider Participation" in the Proxy Statement, and the Compensation Committee Report will be included in the Proxy Statement under the heading "Compensation Committee Report." The information to be included therein is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding security ownership of certain beneficial owners and management will be included in the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners, Directors and Executive Officers" and the information to be included therein is incorporated herein by reference.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information, as of December 31, 2014, relating to our equity compensation plans pursuant to which equity awards are authorized for issuance. Refer to Note 16 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)
2,694,332

 
$
19.63

 
3,471,796

Not approved by security holders (3)
1,741,098

 
29.16

 
—

Total
4,435,430

 
$
23.92

 
3,471,796

(1) 
Weighted-average exercise price is based solely on securities with an exercise price.
(2) 
Includes all outstanding stock options under the 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, 2014, the weighted-average remaining contractual term was 3.0 years. 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.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE

Information regarding certain relationships and related party transactions will be included in our Proxy Statement under the heading "Transactions with Related Persons" and the information to be included therein is incorporated herein by reference. Information regarding our directors and their independence will be included in the Proxy Statement under the heading "Corporate Governance" and the information to be included therein is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding the fees we paid our independent accountants, Ernst & Young LLP, during 2014 and 2013 and the Audit Committee's policies and procedures regarding the pre-approval of accounting services will be included in the Proxy Statement under the headings "Principal Accounting Firm Fees" and "Pre-Approval Procedures" and the information to be included therein is incorporated herein by reference.


162

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, 2014 and 2013.
 
 
 
 
 
Consolidated Statements of Income for the years ended December 31, 2014, 2013, and 2012.
 
 
 
 
 
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013, and 2012.
 
 
 
 
 
Consolidated Statements of Changes in Equity for the years ended December 31, 2014, 2013, and 2012.
 
 
 
 
 
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012.
 
 
 
 
 
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.

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:
 
March 2, 2015
 


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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 March 2, 2015.

 
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 and Principal Accounting Officer
 
Paul E. Carey
 
 
 
 
 
 
 
/s/ James M. Guyette
 
Chairman and Director
 
James M. Guyette
 
 
 
 
 
 
 
/s/ Norman R. Bobins
 
Director
 
Norman R. Bobins
 
 
 
 
 
 
 
/s/ Robert F. Coleman
 
Director
 
Robert F. Coleman
 
 
 
 
 
 

164

 
 
 
 
 
 
 
 
 
Signatures
 
        Title
 
 
 
 
 
 
 
 
 
/s/ Ralph B. Mandell
 
Director
 
Ralph B. Mandell
 
 
 
 
 
 
 
/s/ Cheryl Mayberry McKissack
 
Director
 
Cheryl Mayberry McKissack
 
 
 
 
 
 
 
/s/ James B. Nicholson
 
Director
 
James B. Nicholson
 
 
 
 
 
 
 
/s/ Edward W. Rabin
 
Director
 
Edward W. Rabin
 
 
 
 
 
 
 
/s/ Michelle L. Collins
 
Director
 
Michelle L. Collins
 
 
 
 
 
 
 
/s/ William R. Rybak
 
Director
 
William R. Rybak
 
 
 
 
 
 
 
/s/ Alejandro Silva
 
Director
 
Alejandro Silva
 
 
 
 
 
 
 
 
 
 
 
 
 
 


165


EXHIBIT INDEX

Exhibit
Number
Description of Documents
3.1
Restated Certificate of Incorporation of PrivateBancorp, Inc., dated August 6, 2013 is incorporated herein by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q (File No. 001-34006) filed on August 7, 2013.
 
 
3.2
Amended and Restated By-laws of PrivateBancorp, Inc. are incorporated herein by reference to Exhibit 3.5 to the Annual Report on Form 10-K (File No. 001-34066) filed on March 1, 2010.
 
 
3.3
Amendment to Amended and Restated By-laws of PrivateBancorp, Inc., is incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-34066) filed on May 24, 2013.
 
 
4.1
Certain instruments defining the rights of the holders of certain securities of PrivateBancorp, Inc. and certain of its subsidiaries, none of which authorize a total amount of securities in excess of 10% of the total assets of PrivateBancorp, Inc. and its subsidiaries on a consolidated basis, have not been filed as exhibits. PrivateBancorp, Inc. hereby agrees to furnish a copy of any of these agreements to the Securities and Exchange Commission upon request.
 
 
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 Incentive Stock Option Agreement pursuant to the PrivateBancorp, Inc. Incentive Compensation Plan is incorporated herein by reference to Exhibit 10.29 to the Annual Report on Form 10-K (File No. 000-25887) filed on March 10, 2005.
 
 
10.3
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.
 
 
10.4
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.
 
 
10.5
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.
 
 
10.6
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.
 
 
10.7
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.
 
 
10.8
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.
 
 
10.9
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.
 
 
10.10
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.
 
 
10.11
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.
 
 
10.12
PrivateBancorp, Inc. 2011 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.
 
 

166

10.13
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.
 
 
10.14
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 Amendment Agreement to Stock Option Agreement pursuant to the PrivateBancorp, Inc. 2011 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.
 
 
10.16
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.
 
 
10.17
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.
 
 
10.18
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.
 
 
10.19
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.
 
 
10.20
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.
 
 
10.21
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.
 
 
10.22
Form of Performance Stock Unit Award Agreement for Executive Officers pursuant to the PrivateBancorp, Inc. 2011 Incentive Compensation Plan, for PSU awards beginning 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.
 
 
10.23
PrivateBancorp, Inc. Amended and Restated 2011 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.
 
 
10.24
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.
 
 
10.25
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.
 
 
10.26
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.
 
 
10.27
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.
 
 
10.28
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.
 
 
10.29
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.

167

 
 
10.30
TARP Compensation Agreement, dated as of March 31, 2011, by and between PrivateBancorp, Inc. and the Chief Executive Officer is incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-34066) filed on May 9, 2011.
 
 
10.31
TARP Compensation Agreement, dated as of March 31, 2011, by and between PrivateBancorp, Inc. and Bruce R. Hague 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, 2011.
 
 
10.32
TARP Compensation Agreement, dated March 15, 2012, by and between PrivateBancorp, Inc. and the Chief Executive Officer 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, 2012.
 
 
10.33
TARP Compensation Agreement, dated March 15, 2012, by and between PrivateBancorp, Inc. and Kevin M. Killips 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, 2012.
 
 
10.34
TARP Compensation Agreement, dated as of March 15, 2012, by and between PrivateBancorp, Inc. and Bruce S. Lubin 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, 2012.
 
 
10.35
Form of Senior Executive Officer Letter Agreement and Waiver executed by each of the following as required pursuant to the Securities Purchase Agreement dated January 30, 2009 entered into between PrivateBancorp, Inc. and the United States Department of the Treasury under the TARP Capital Purchase Program: Larry D. Richman, Bruce Lubin, Bruce Hague, and Karen Case, is incorporated herein by reference to Exhibit 10.33 to the Annual Report on Form 10-K (File No. 001-34066) filed on March 2, 2009.
 
 
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, 2014, filed on March 2, 2015, 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.

168