PRIVATEBANCORP, INC - FORM 10-Q - May 5, 2016

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EX-12 - EXHIBIT 12 - PRIVATEBANCORP, INCpvtb0331201610-qex12.htm
EX-31.1 - EXHIBIT 31.1 - PRIVATEBANCORP, INCpvtb0331201610-qex311.htm
EX-31.2 - EXHIBIT 31.2 - PRIVATEBANCORP, INCpvtb0331201610-qex312.htm
EX-32 - EXHIBIT 32 - PRIVATEBANCORP, INCpvtb0331201610-qex32.htm
EX-99 - EXHIBIT 99 - PRIVATEBANCORP, INCpvtb0331201610-qex99.htm
EX-15 - EXHIBIT 15 - PRIVATEBANCORP, INCpvtb0331201610-qex15.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________________
FORM 10-Q
______________________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    .
Commission File Number 001-34066
______________________________________________ 
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter)
______________________________________________ 
Delaware
 
36-3681151
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
120 South LaSalle Street
Chicago, Illinois
 
60603
(Address of principal executive offices)
 
(zip code)
(312) 564-2000
Registrant’s telephone number, including area code
______________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
As of May 4, 2016, there were 79,385,364 shares of the issuer’s voting common stock, no par value, outstanding.

1

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


2

PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except shares and per share data)
 
March 31,
2016
 
December 31,
2015
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Cash and due from banks
$
133,001

 
$
145,147

Federal funds sold and interest-bearing deposits in banks
337,465

 
238,511

Loans held-for-sale
64,029

 
108,798

Securities available-for-sale, at fair value (pledged as collateral to creditors: $104.7 million - 2016; $100.2 million - 2015)
1,831,848

 
1,765,366

Securities held-to-maturity, at amortized cost (fair value: $1.5 billion - 2016; $1.4 billion - 2015)
1,456,760

 
1,355,283

Federal Home Loan Bank ("FHLB") stock
38,113

 
26,613

Loans – excluding covered assets, net of unearned fees
13,457,665

 
13,266,475

Allowance for loan losses
(165,356
)
 
(160,736
)
Loans, net of allowance for loan losses and unearned fees
13,292,309

 
13,105,739

Covered assets
25,769

 
26,954

Allowance for covered loan losses
(5,526
)
 
(5,712
)
Covered assets, net of allowance for covered loan losses
20,243

 
21,242

Other real estate owned, excluding covered assets
14,806

 
7,273

Premises, furniture, and equipment, net
41,717

 
42,405

Accrued interest receivable
47,349

 
45,482

Investment in bank owned life insurance
57,011

 
56,653

Goodwill
94,041

 
94,041

Other intangible assets
2,890

 
3,430

Derivative assets
66,406

 
40,615

Other assets (1)
169,384

 
196,250

Total assets (1)
$
17,667,372

 
$
17,252,848

Liabilities
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
4,338,177

 
$
4,355,700

Interest-bearing
10,126,692

 
9,989,892

Total deposits
14,464,869

 
14,345,592

Short-term borrowings
602,365

 
372,467

Long-term debt (1)
688,238

 
688,215

Accrued interest payable
6,630

 
7,080

Derivative liabilities
22,498

 
18,229

Other liabilities
114,781

 
122,314

Total liabilities (1)
15,899,381

 
15,553,897

Equity
 
 
 
Common stock (no par value, $1 stated value; authorized shares: 174 million; issued shares: 79,442,549 - 2016 and 79,099,157 - 2015)
78,894

 
78,439

Treasury stock, at cost (120,239 - 2016 and 2,574 - 2015)
(4,389
)
 
(103
)
Additional paid-in capital
1,078,470

 
1,071,674

Retained earnings
580,418

 
531,682

Accumulated other comprehensive income, net of tax
34,598

 
17,259

Total equity
1,767,991

 
1,698,951

Total liabilities and equity (1)
$
17,667,372

 
$
17,252,848

See accompanying notes to consolidated financial statements.
(1) 
Prior period amounts have been updated to reflect the first quarter 2016 adoption of Accounting Standard Update ("ASU") 2015-03 and ASU 2015-15 related to debt issuance costs.  

3

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
 
Three Months Ended March 31,
 
2016
 
2015
Interest Income
 
 
 
Loans, including fees
$
140,067

 
$
122,702

Federal funds sold and interest-bearing deposits in banks
340

 
261

Securities:
 
 
 
Taxable
15,210

 
13,556

Exempt from Federal income taxes
2,333

 
1,806

Other interest income
150

 
48

Total interest income
158,100

 
138,373

Interest Expense
 
 
 
Deposits
13,141

 
11,255

Short-term borrowings
230

 
197

Long-term debt
5,211

 
4,928

Total interest expense
18,582

 
16,380

Net interest income
139,518

 
121,993

Provision for loan and covered loan losses
6,402

 
5,646

Net interest income after provision for loan and covered loan losses
133,116

 
116,347

Non-interest Income
 
 
 
Asset management
4,725

 
4,363

Mortgage banking
2,969

 
3,775

Capital markets products
5,199

 
4,172

Treasury management
8,174

 
7,327

Loan, letter of credit and commitment fees
5,200

 
5,106

Syndication fees
5,434

 
2,622

Deposit service charges and fees and other income
1,370

 
5,617

Net securities gains
531

 
534

Total non-interest income
33,602

 
33,516

Non-interest Expense
 
 
 
Salaries and employee benefits
58,339

 
52,361

Net occupancy and equipment expense
7,215

 
6,934

Technology and related costs
5,293

 
4,351

Marketing
4,404

 
3,578

Professional services
2,994

 
2,310

Outsourced servicing costs
1,840

 
1,680

Net foreclosed property expenses
566

 
1,328

Postage, telephone, and delivery
840

 
862

Insurance
3,820

 
3,211

Loan and collection expense
1,532

 
2,268

Other expenses
3,650

 
4,262

Total non-interest expense
90,493

 
83,145

Income before income taxes
76,225

 
66,718

Income tax provision
26,673

 
25,234

Net income available to common stockholders
$
49,552

 
$
41,484

Per Common Share Data
 
 
 
Basic earnings per share
$
0.63

 
$
0.53

Diluted earnings per share
$
0.62

 
$
0.52

Cash dividends declared
$
0.01

 
$
0.01

Weighted-average common shares outstanding
78,550

 
77,407

Weighted-average diluted common shares outstanding
79,856

 
78,512

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

4

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited) 
 
Three Months Ended March 31,
 
2016
 
2015
Net income
$
49,552

 
$
41,484

Other comprehensive income:
 
 
 
Available-for-sale securities:
 
 
 
Net unrealized gains
18,930

 
8,590

Reclassification of net gains included in net income
(531
)
 
(534
)
Income tax expense
(7,079
)
 
(3,148
)
Net unrealized gains on available-for-sale securities
11,320

 
4,908

Cash flow hedges:
 
 
 
Net unrealized gains
12,008

 
8,630

Reclassification of net gains included in net income
(2,190
)
 
(2,538
)
Income tax expense
(3,799
)
 
(2,370
)
Net unrealized gains on cash flow hedges
6,019

 
3,722

Other comprehensive income
17,339

 
8,630

Comprehensive income
$
66,891

 
$
50,114

See accompanying notes to consolidated financial statements.

5

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in thousands, except per share data)
(Unaudited) 
 
Common
Shares
Out-
standing
 
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumu-
lated
Other
Compre-
hensive
Income
 
Total
Balance at January 1, 2015
78,178

 
 
$
77,211

 
$
(53
)
 
$
1,034,048

 
$
349,556

 
$
20,917

 
$
1,481,679

Comprehensive income (1)
—

 
 
—

 
—

 
—

 
41,484

 
8,630

 
50,114

Cash dividends declared ($0.01 per common share)
—

 
 
—

 
—

 
—

 
(793
)
 
—

 
(793
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonvested (restricted) stock grants
248

 
 
—

 
—

 
—

 
—

 
—

 
—

Exercise of stock options
235

 
 
227

 
316

 
5,015

 
—

 
—

 
5,558

Restricted stock activity
—

 
 
530

 
—

 
(530
)
 
—

 
—

 
—

Deferred compensation plan
1

 
 
—

 
22

 
124

 
—

 
—

 
146

Excess tax benefit from share-based compensation plans
—

 
 
—

 
—

 
3,427

 
—

 
—

 
3,427

Stock repurchased in connection with benefit plans
(168
)
 
 
—

 
(5,845
)
 
—

 
—

 
—

 
(5,845
)
Share-based compensation expense
—

 
 
—

 
—

 
5,143

 
—

 
—

 
5,143

Balance at March 31, 2015
78,494

 
 
$
77,968

 
$
(5,560
)
 
$
1,047,227

 
$
390,247

 
$
29,547

 
$
1,539,429

Balance at January 1, 2016
79,097

 
 
$
78,439

 
$
(103
)
 
$
1,071,674

 
$
531,682

 
$
17,259

 
$
1,698,951

Comprehensive income (1)
—

 
 
—

 
—

 
—

 
49,552

 
17,339

 
66,891

Cash dividends declared ($0.01 per common share)
—

 
 
—

 
—

 
—

 
(816
)
 
—

 
(816
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonvested (restricted) stock grants
263

 
 
—

 
—

 
—

 
—

 
—

 
—

Exercise of stock options
53

 
 
44

 
311

 
625

 
—

 
—

 
980

Restricted stock activity
32

 
 
408

 
—

 
(408
)
 
—

 
—

 
—

Deferred compensation plan
5

 
 
3

 
66

 
222

 
—

 
—

 
291

Stock repurchased in connection with benefit plans
(128
)
 
 
—

 
(4,663
)
 
—

 
—

 
—

 
(4,663
)
Share-based compensation expense
—

 
 
—

 
—

 
6,357

 
—

 
—

 
6,357

Balance at March 31, 2016
79,322

 
 
$
78,894

 
$
(4,389
)
 
$
1,078,470

 
$
580,418

 
$
34,598

 
$
1,767,991

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

6

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2016
 
2015
Operating Activities
 
 
 
Net income
$
49,552

 
$
41,484

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan and covered loan losses
6,402

 
5,646

Provision for unfunded commitments
595

 
376

Depreciation of premises, furniture, and equipment
2,348

 
2,163

Net amortization of premium on securities
5,099

 
4,044

Net securities gains
(531
)
 
(534
)
Valuation adjustments on other real estate owned
588

 
935

Net losses on sale of other real estate owned
24

 
227

Net amortization of discount on covered assets
(51
)
 
141

Bank owned life insurance income
(358
)
 
(354
)
Net increase (decrease) in deferred loan fees and unamortized discounts and premiums on loans
3,415

 
1,025

Share-based compensation expense
6,357

 
5,143

Excess tax benefit from exercise of stock options and vesting of restricted shares
(2,081
)
 
(3,772
)
Provision for deferred income tax expense
1,300

 
3,694

Amortization of other intangibles
540

 
655

Originations and purchases of loans held-for-sale
(101,612
)
 
(166,002
)
Proceeds from sales of loans held-for-sale
149,001

 
195,010

Net gains from sales of loans held-for-sale
(2,604
)
 
(3,268
)
Gain on sale of branch
—

 
(4,092
)
Net increase in derivative assets and liabilities
(21,522
)
 
(13,345
)
Net increase in accrued interest receivable
(1,867
)
 
(671
)
Net (decrease) increase in accrued interest payable
(450
)
 
56

Net decrease in other assets
24,490

 
49,691

Net decrease in other liabilities
(6,031
)
 
(12,285
)
Net cash provided by operating activities
112,604

 
105,967

Investing Activities
 
 
 
Available-for-sale securities:
 
 
 
Proceeds from maturities, prepayments, and calls
49,584

 
48,884

Proceeds from sales
26,682

 
28,931

Purchases
(126,833
)
 
(57,733
)
Held-to-maturity securities:
 
 
 
Proceeds from maturities, prepayments, and calls
41,308

 
34,460

Purchases
(144,869
)
 
(66,457
)
Net (purchase) redemption of FHLB stock
(11,500
)
 
110

Net increase in loans
(205,715
)
 
(282,821
)
Net decrease in covered assets
1,084

 
2,475

Proceeds from sale of other real estate owned
1,149

 
2,781

Net purchases of premises, furniture, and equipment
(1,660
)
 
(1,564
)
Net cash used in investing activities
(370,770
)
 
(290,934
)
Financing Activities
 
 
 
Net increase in deposit accounts
119,277

 
889,544

Net (decrease) increase in short-term borrowings, excluding FHLB advances
(102
)
 
1,403

Net increase (decrease) in FHLB advances
230,000

 
(175,000
)
Stock repurchased in connection with benefit plans
(4,663
)
 
(5,845
)
Cash dividends paid
(809
)
 
(779
)
Proceeds from exercise of stock options and issuance of common stock under benefit plans
1,271

 
5,704

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

 
3,772

Net cash provided by financing activities
344,974

 
718,799

Net increase in cash and cash equivalents
86,808

 
533,832

Cash and cash equivalents at beginning of year
383,658

 
424,552

Cash and cash equivalents at end of period
$
470,466

 
$
958,384

See accompanying notes to consolidated financial statements.

7

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Amounts in thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2016
 
2015
Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
19,032

 
$
16,324

Cash paid for income taxes
3,272

 
1,863

Non-cash transfers of loans to loans held-for-sale
28,335

 
50,263

Non-cash transfers of loans to other real estate
9,294

 
2,152

See accompanying notes to consolidated financial statements.

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated interim financial statements of PrivateBancorp, Inc. (“PrivateBancorp” or the “Company”), a Delaware corporation, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include certain information and footnote disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete annual financial statements. Accordingly, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

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

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

In preparing the consolidated financial statements, we have considered the impact of events occurring subsequent to March 31, 2016, for potential recognition or disclosure.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

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

Amendments to the Consolidation Analysis - On January 1, 2016, we adopted new accounting guidance issued by the FASB that changes certain aspects of the variable interest and voting interest consolidation models. The amendments modify existing guidance on (1) the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, (2) when fee arrangements represent variable interests in a VIE, and (3) the primary beneficiary determination for VIEs. Additionally, the guidance eliminates the presumption that a general partner controls a limited partnership under the voting interest model and exempts reporting entities from consolidating money market funds that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940. The Company elected to apply the guidance through a cumulative effect adjustment as of January 1, 2016. The adoption of this guidance did not impact our consolidated financial position or consolidated results of operations.

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

9


Improvements to Employee Share-Based Payment Accounting - In March 2016, the FASB issued guidance that amends certain aspects of share-based payment accounting. The new guidance (1) requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, and eliminates the accounting for additional paid-in-capital (“APIC”) pools; (2) allows the Company to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting; (3) requires the Company to make an accounting policy election to either recognize forfeitures as they occur or estimate the number of awards expected to be forfeited; (4) requires the Company to present excess tax benefits as an operating activity on the statement of cash flows; and (5) clarifies that the Company must classify cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Regarding the accounting policy election related to the accounting for forfeitures, the Company has elected to estimate the number of awards expected to be forfeited, consistent with our past practice of estimating forfeitures. As permitted under the new guidance, the Company has elected to early adopt the guidance for the Company’s financial statements that include periods beginning on January 1, 2016. The Company has applied the guidance related to items (1) and (4) prospectively; the guidance related to item (5) retrospectively; and the guidance related to items (2) and (3) using a modified retrospective transition method with a cumulative-effect adjustment to retained earnings. In the first quarter 2016, the Company recognized a $2.1 million tax benefit in the consolidated statements of income within the income tax provision, representing the prospective application of the accounting change described in (1) above. Adoption of all other changes did not have an impact on our consolidated financial position or consolidated results of operations.

Accounting Pronouncements Pending Adoption

Revenue from Contracts with Customers - In May 2014, August 2015 and March 2016, the FASB issued new revenue recognition guidance that will replace most of the existing revenue recognition guidance in U.S. GAAP. All arrangements involving the transfer of goods or services to customers are within the scope of the guidance, except for certain contracts subject to other U.S. GAAP guidance, including lease contracts and rights and obligations related to financial instruments. The standard’s core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also includes new disclosure requirements related to the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for the Company’s financial statements beginning January 1, 2018. The Company may choose to apply the new standard either retrospectively or through a cumulative effect adjustment as of January 1, 2018. 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.

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.

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

Leases - In February 2016, the FASB issued guidance that amends the accounting for leases. Under the new guidance, lessees will need to recognize a right-of-use asset and a lease liability for the vast majority of leases. Operating leases will result in straight-line expense, while finance leases will result in a front-loaded expense pattern. Classification will be based on criteria that are largely similar to those applied in current lease accounting. Lessor accounting will remain similar to the current model. Lessors will classify leases as operating, direct financing, or sales-type, consistent with the current model. The new guidance will also require extensive quantitative and qualitative disclosures related to the revenue and expense recognized and expected to be recognized over the lease term, as well as significant judgments made by management. The guidance will be effective for the Company’s financial statements that include periods beginning January 1, 2018, and early adoption is permitted. The new standard

10

must be applied using a modified retrospective transition. The Company is in the process of determining the effect of the new guidance on our financial position and consolidated results of operations.

3. SECURITIES

Securities Portfolio
(Amounts in thousands)

 
March 31, 2016
 
December 31, 2015
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
 
 
Gains
 
Losses
 
 
 
Gains
 
Losses
 
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
347,700

 
$
3,223

 
$
(18
)
 
$
350,905

 
$
322,922

 
$
30

 
$
(1,301
)
 
$
321,651

U.S. Agencies
46,390

 
397

 
—

 
46,787

 
46,504

 
—

 
(406
)
 
46,098

Collateralized mortgage obligations
90,496

 
3,099

 
(10
)
 
93,585

 
97,260

 
2,784

 
(72
)
 
99,972

Residential mortgage-backed securities
856,515

 
21,822

 
(272
)
 
878,065

 
817,006

 
15,870

 
(3,021
)
 
829,855

State and municipal securities
449,076

 
13,569

 
(139
)
 
462,506

 
458,402

 
9,779

 
(391
)
 
467,790

Total
$
1,790,177

 
$
42,110

 
$
(439
)
 
$
1,831,848

 
$
1,742,094

 
$
28,463

 
$
(5,191
)
 
$
1,765,366

Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
49,013

 
$
—

 
$
(784
)
 
$
48,229

 
$
50,708

 
$
—

 
$
(1,729
)
 
$
48,979

Residential mortgage-backed securities
1,154,838

 
14,799

 
(315
)
 
1,169,322

 
1,069,746

 
4,809

 
(4,983
)
 
1,069,572

Commercial mortgage-backed securities
247,980

 
4,470

 
(215
)
 
252,235

 
229,722

 
499

 
(2,158
)
 
228,063

State and municipal securities
254

 
—

 
—

 
254

 
254

 
—

 
—

 
254

Foreign sovereign debt
500

 
—

 
—

 
500

 
500

 
—

 
—

 
500

Other securities
4,175

 
—

 
(72
)
 
4,103

 
4,353

 
—

 
(480
)
 
3,873

Total
$
1,456,760

 
$
19,269

 
$
(1,386
)
 
$
1,474,643

 
$
1,355,283

 
$
5,308

 
$
(9,350
)
 
$
1,351,241


The carrying value of securities pledged to secure public deposits, FHLB advances, trust deposits, Federal Reserve Bank (“FRB”) discount window borrowing availability, derivative transactions, and standby letters of credit with counterparty banks and for other purposes as permitted or required by law totaled $437.9 million and $421.9 million at March 31, 2016 and December 31, 2015, respectively. Of total pledged securities, securities pledged to creditors under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties totaled $104.7 million and $100.2 million at March 31, 2016 and December 31, 2015, respectively.

Excluding securities issued or backed by the U.S. Government, its agencies and U.S. Government-sponsored enterprises, there were no investments in securities from one issuer that exceeded 10% of consolidated equity at March 31, 2016 or December 31, 2015.


11

The following table presents the fair values of securities with unrealized losses as of March 31, 2016 and December 31, 2015. The securities presented are grouped according to the time periods during which the securities have been in a continuous unrealized loss position.

Securities in Unrealized Loss Position
(Amounts in thousands)
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Number of Securities
 
Fair
Value
 
Unrealized
Losses
 
Number of Securities
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
As of March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
—

 
$
—

 
$
—

 
1

 
$
25,856

 
$
(18
)
 
$
25,856

 
$
(18
)
Collateralized mortgage obligations
2

 
1,249

 
(4
)
 
1

 
1,801

 
(6
)
 
3,050

 
(10
)
Residential mortgage-backed securities
3

 
70,815

 
(51
)
 
5

 
57,848

 
(221
)
 
128,663

 
(272
)
State and municipal securities
30

 
17,451

 
(128
)
 
9

 
2,715

 
(11
)
 
20,166

 
(139
)
Total

 
$
89,515

 
$
(183
)
 


 
$
88,220

 
$
(256
)
 
$
177,735

 
$
(439
)
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
—

 
$
—

 
$
—

 
4

 
$
48,229

 
$
(784
)
 
$
48,229

 
$
(784
)
Residential mortgage-backed securities
7

 
70,469

 
(48
)
 
9

 
32,497

 
(267
)
 
102,966

 
(315
)
Commercial mortgage-backed securities
3

 
10,447

 
(119
)
 
8

 
23,256

 
(96
)
 
33,703

 
(215
)
Other securities
1

 
4,103

 
(72
)
 
—

 
—

 
—

 
4,103

 
(72
)
Total

 
$
85,019

 
$
(239
)
 

 
$
103,982

 
$
(1,147
)
 
$
189,001

 
$
(1,386
)
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
11

 
$
271,006

 
$
(1,081
)
 
1

 
$
25,773

 
$
(220
)
 
$
296,779

 
$
(1,301
)
U.S. Agencies
3

 
46,098

 
(406
)
 
—

 
—

 
—

 
46,098

 
(406
)
Collateralized mortgage obligations
6

 
7,528

 
(72
)
 
—

 
—

 
—

 
7,528

 
(72
)
Residential mortgage-backed securities
28

 
243,862

 
(1,148
)
 
5

 
75,533

 
(1,873
)
 
319,395

 
(3,021
)
State and municipal securities
95

 
48,974

 
(353
)
 
12

 
3,485

 
(38
)
 
52,459

 
(391
)
Total

 
$
617,468

 
$
(3,060
)
 


 
$
104,791

 
$
(2,131
)
 
$
722,259

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

 
$
—

 
$
—

 
4

 
$
48,979

 
$
(1,729
)
 
$
48,979

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

 
512,395

 
(3,680
)
 
10

 
57,340

 
(1,303
)
 
569,735

 
(4,983
)
Commercial mortgage-backed securities
35

 
128,434

 
(1,502
)
 
12

 
37,350

 
(656
)
 
165,784

 
(2,158
)
Other securities
1

 
3,873

 
(480
)
 
—

 
—

 
—

 
3,873

 
(480
)
Total

 
$
644,702

 
$
(5,662
)
 

 
$
143,669

 
$
(3,688
)
 
$
788,371

 
$
(9,350
)

There were $192.2 million of securities with $1.4 million in an unrealized loss position for greater than 12 months at March 31, 2016. At December 31, 2015, there were $248.5 million of securities with $5.8 million in an unrealized loss position for greater than 12 months. The Company does not consider these unrealized losses to be credit-related. These unrealized losses relate to

12

changes in interest rates and market spreads. We do not intend to sell the securities and we do not believe it is more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.

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

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

Remaining Contractual Maturity of Securities
(Amounts in thousands)

 
March 31, 2016
 
Available-For-Sale
 
Held-To-Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
U.S. Treasury, U.S. Agencies, state and municipal and foreign sovereign debt and other securities:
 
 
 
 
 
 
 
One year or less
$
14,462

 
$
14,582

 
$
132

 
$
132

One year to five years
564,970

 
572,917

 
622

 
622

Five years to ten years
234,094

 
242,280

 
4,175

 
4,103

After ten years
29,640

 
30,419

 
—

 
—

All other securities:
 
 
 
 
 
 
 
Collateralized mortgage obligations
90,496

 
93,585

 
49,013

 
48,229

Residential mortgage-backed securities
856,515

 
878,065

 
1,154,838

 
1,169,322

Commercial mortgage-backed securities
—

 
—

 
247,980

 
252,235

Total
$
1,790,177

 
$
1,831,848

 
$
1,456,760

 
$
1,474,643


The following table presents gains on securities for the three months ended March 31, 2016 and 2015.

Securities Gains
(Amounts in thousands)
 
Three Months Ended March 31,
 
2016
 
2015
Proceeds from sales
$
26,682

 
$
28,931

Gross realized gains
$
553

 
$
538

Gross realized losses
(22
)
 
(4
)
Net realized gains
$
531

 
$
534

Income tax provision on net realized gains
$
205

 
$
210

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

All non-marketable Community Reinvestment Act (“CRA”) qualified investments, totaling $53.9 million and $54.2 million at March 31, 2016 and December 31, 2015, respectively, are recorded in other assets on the consolidated statements of financial condition.


13

4. LOANS AND CREDIT QUALITY

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

Loan Portfolio
(Amounts in thousands)
 
 
March 31,
2016
 
December 31,
2015
Commercial and industrial
$
6,812,596

 
$
6,747,389

Commercial - owner-occupied commercial real estate
1,865,242

 
1,888,238

Total commercial
8,677,838

 
8,635,627

Commercial real estate
2,705,694

 
2,629,873

Commercial real estate - multi-family
764,292

 
722,637

Total commercial real estate
3,469,986

 
3,352,510

Construction
537,304

 
522,263

Residential real estate
477,263

 
461,412

Home equity
126,096

 
129,317

Personal
169,178

 
165,346

Total loans
$
13,457,665

 
$
13,266,475

Net deferred loan fees and unamortized discount and premium on loans, included as a reduction in total loans
$
51,424

 
$
48,009

Overdrawn demand deposits included in total loans
$
4,299

 
$
2,654


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

Loans Held-For-Sale
(Amounts in thousands)

 
March 31,
2016
 
December 31,
2015
Mortgage loans held-for-sale (1)
$
15,568

 
$
35,704

Other loans held-for-sale (2)
48,461

 
73,094

Total loans held-for-sale
$
64,029

 
$
108,798

(1) 
Comprised of residential mortgage loan originations intended to be sold in the secondary market. The Company accounts for these loans under the fair value option. Refer to Note 17 for additional information regarding mortgage loans held-for-sale.
(2) 
Amounts at March 31, 2016 and December 31, 2015, represent commercial, commercial real estate and construction loans carried at the lower of aggregate cost or fair value, including one nonaccrual loan totaling $583,000 and $667,000 at March 31, 2016 and December 31, 2015, respectively. Generally, the Company intends to sell these loans within 30-60 days from the date the intent to sell was established.


14

Carrying Value of Loans Pledged
(Amounts in thousands)
 
 
March 31,
2016
 
December 31,
2015
Loans pledged to secure outstanding borrowings or availability:
 
 
 
FRB discount window borrowings (1)
$
430,934

 
$
440,023

FHLB advances (2)
4,096,673

 
4,133,942

Total
$
4,527,607

 
$
4,573,965

(1) 
No borrowings were outstanding at March 31, 2016 and December 31, 2015.
(2) 
Refer to Notes 8 and 9 for additional information regarding FHLB advances.

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 March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
8,624,851

 
$
11,496

 
$
117

 
$
—

 
$
8,636,464

 
$
41,374

 
$
8,677,838

Commercial real estate
3,459,778

 
1,508

 
458

 
—

 
3,461,744

 
8,242

 
3,469,986

Construction
537,304

 
—

 
—

 
—

 
537,304

 
—

 
537,304

Residential real estate
471,645

 
1,718

 
—

 
—

 
473,363

 
3,900

 
477,263

Home equity
120,136

 
40

 
377

 
—

 
120,553

 
5,543

 
126,096

Personal
169,149

 
10

 
8

 
—

 
169,167

 
11

 
169,178

Total loans
$
13,382,863

 
$
14,772

 
$
960

 
$
—

 
$
13,398,595

 
$
59,070

 
$
13,457,665

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

 
$
6,641

 
$
1,042

 
$
—

 
$
8,602,833

 
$
32,794

 
$
8,635,627

Commercial real estate
3,343,714

 
—

 
295

 
—

 
3,344,009

 
8,501

 
3,352,510

Construction
522,263

 
—

 
—

 
—

 
522,263

 
—

 
522,263

Residential real estate
455,764

 
613

 
273

 
—

 
456,650

 
4,762

 
461,412

Home equity
121,580

 
66

 
—

 
—

 
121,646

 
7,671

 
129,317

Personal
165,188

 
132

 
5

 
—

 
165,325

 
21

 
165,346

Total loans
$
13,203,659

 
$
7,452

 
$
1,615

 
$
—

 
$
13,212,726

 
$
53,749

 
$
13,266,475


Impaired Loans

Impaired loans consist of nonaccrual loans (which include nonaccrual 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 due to providing a concession to a borrower that is inconsistent with the risk profile.


15

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 March 31, 2016
 
 
 
 
 
 
 
 
 
Commercial
$
70,925

 
$
43,043

 
$
25,161

 
$
68,204

 
$
4,671

Commercial real estate
9,891

 
1,855

 
6,387

 
8,242

 
1,062

Residential real estate
4,088

 
—

 
3,900

 
3,900

 
243

Home equity
7,680

 
2,597

 
4,951

 
7,548

 
775

Personal
11

 
—

 
11

 
11

 
—

Total impaired loans
$
92,595

 
$
47,495

 
$
40,410

 
$
87,905

 
$
6,751

As of December 31, 2015
 
 
 
 
 
 
 
 
 
Commercial
$
49,912

 
$
27,300

 
$
20,020

 
$
47,320

 
$
4,458

Commercial real estate
14,150

 
2,085

 
6,416

 
8,501

 
1,156

Residential real estate
4,950

 
—

 
4,762

 
4,762

 
539

Home equity
10,071

 
2,626

 
7,065

 
9,691

 
1,106

Personal
21

 
—

 
21

 
21

 
3

Total impaired loans
$
79,104

 
$
32,011

 
$
38,284

 
$
70,295

 
$
7,262


Average Recorded Investment and Interest Income Recognized on Impaired Loans (1) 
(Amounts in thousands)

 
Three Months Ended March 31,
 
2016
 
2015
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial
$
51,994

 
$
320

 
$
53,048

 
$
184

Commercial real estate
8,495

 
—

 
17,897

 
3

Residential real estate
4,129

 
—

 
4,979

 
—

Home equity
8,429

 
27

 
13,332

 
22

Personal
45

 
—

 
356

 
—

Total
$
73,092

 
$
347

 
$
89,612

 
$
209

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

Credit Quality Indicators

We attempt to mitigate risk through loan structure, collateral, monitoring, and other credit risk management controls. We have adopted an internal risk rating policy 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 considered “pass” rated credits that we believe exhibit acceptable financial performance, cash flow, and leverage. Credits rated 6 are performing in accordance with contractual terms but are considered “special mention” as they demonstrate potential weakness that, if left unresolved, may result in deterioration in our credit position and/or the repayment prospects for the credit. Borrowers rated special mention may exhibit adverse operating trends, high leverage, tight liquidity or other credit concerns. Loans rated 7 may be classified as either accruing (“potential problem”) or nonaccrual (“nonperforming”). Potential problem loans, like special mention, are loans that are performing in accordance with contractual

16

terms, but for which management has some level of concern (greater than that of special mention loans) about the ability of the borrowers to meet existing repayment terms in future periods. Potential problem loans continue to accrue interest but the ultimate collection of these loans in full is a risk due to the same conditions that characterize a 6-rated credit. These credits may also have somewhat increased risk profiles as a result of the current net worth and/or paying capacity of the obligor or guarantors or a declining value of the collateral pledged. These loans generally have a well-defined weakness that may jeopardize collection of the debt and are characterized by the distinct possibility that we may sustain some loss if the deficiencies are not resolved. Although these loans are generally identified as potential problem loans and require additional attention by management, they may never become nonperforming. Nonperforming loans include nonaccrual loans risk-rated 7 or 8 and have all the weaknesses inherent in a 7-rated potential problem loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently-existing facts, conditions and values, highly questionable and improbable. Special mention, potential problem and nonperforming loans are reviewed, at a minimum, on a quarterly basis, while all other rated credits over a certain dollar threshold, depending on loan type, are reviewed annually or more frequently as the circumstances warrant.

Credit Quality Indicators
(Dollars in thousands)
 
 
Special
Mention
 
% of
Portfolio
Loan
Type
 
 
Potential
Problem
Loans
 
% of
Portfolio
Loan
Type
 
 
Non-
Performing
Loans
 
% of
Portfolio
Loan
Type
 
 
Total Loans
As of March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
111,224

 
1.3
 
 
$
129,776

 
1.5
 
 
$
41,374

 
0.5
 
 
$
8,677,838

Commercial real estate
2,600

 
0.1
 
 
119

 
*
 
 
8,242

 
0.2
 
 
3,469,986

Construction
—

 
—
 
 
—

 
—
 
 
—

 
—
 
 
537,304

Residential real estate
6,275

 
1.3
 
 
5,621

 
1.2
 
 
3,900

 
0.8
 
 
477,263

Home equity
555

 
0.4
 
 
789

 
0.6
 
 
5,543

 
4.4
 
 
126,096

Personal
585

 
0.3
 
 
17

 
*
 
 
11

 
*
 
 
169,178

Total
$
121,239

 
0.9
 
 
$
136,322

 
1.0
 
 
$
59,070

 
0.4
 
 
$
13,457,665

As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
85,217

 
1.0
 
 
$
124,654

 
1.4
 
 
$
32,794

 
0.4
 
 
$
8,635,627

Commercial real estate
27,580

 
0.8
 
 
121

 
*
 
 
8,501

 
0.3
 
 
3,352,510

Construction
—

 
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522,263

Residential real estate
5,988