ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
PrivateBancorp, Inc. (“PrivateBancorp,” the “Company,” we, our or us), is a Delaware corporation and bank holding company headquartered in Chicago, Illinois. The PrivateBank and Trust Company (the “Bank” or “PrivateBank”), our bank subsidiary, provides customized business and personal financial services to middle market companies, as well as business owners, executives, entrepreneurs and families in all the markets and communities we serve. As of
March 31, 2016
, we had
35 offices
located in
12 states
, including 24 full-service banking branches in four states. Our full-service bank branches are located principally in the greater Chicago metropolitan area, with additional branches in the St. Louis, Milwaukee and Detroit metropolitan areas. We have non-depository commercial banking offices strategically located in major commercial centers to further our reach with our core client base of middle market companies.
We deliver a full spectrum of commercial and personal banking products and services to our clients through our Commercial Banking, Community Banking and Private Wealth businesses. We offer clients a full range of lending, treasury management, capital markets and other banking products to meet their commercial needs, and residential mortgage banking, private banking and asset management services to meet their personal needs.
The following discussion and analysis should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes presented elsewhere in this report, as well as our audited consolidated financial statements and accompanying notes included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2015
. Results of operations for the
quarter ended March 31, 2016
, are not necessarily indicative of results to be expected for the year ending
December 31, 2016
. Unless otherwise stated, all earnings per share data included in this section and through the remainder of this discussion are presented on a fully diluted basis.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this report that are not historical facts may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements represent management’s current beliefs and expectations regarding future events, such as our anticipated future financial results, credit quality, liquidity, revenues, expenses, or other financial items, and the impact of business plans and strategies or legislative or regulatory actions. Forward-looking statements are typically identified by words such as “may,” “might,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “project,” “potential,” or “continue” or other comparable terminology.
Our ability to predict results or the actual effects of future plans, strategies or events is inherently uncertain. Factors which could cause actual results or conditions to differ from those reflected in forward-looking statements include:
|
|
•
|
uncertainty regarding geopolitical developments and the U.S. and global economic outlook that may continue to impact market conditions or affect demand for certain banking products and services;
|
|
|
•
|
unanticipated developments in pending or prospective loan transactions or greater-than-expected paydowns or payoffs of existing loans;
|
|
|
•
|
competitive pressures in the financial services industry relating to both pricing and loan structures, which may impact our growth rate;
|
|
|
•
|
unforeseen credit quality problems or changing economic conditions that could result in charge-offs greater than we have anticipated in our allowance for loan losses or changes in value of our investments;
|
|
|
•
|
unanticipated changes in monetary policies of the Federal Reserve or significant adjustments in the pace of, or market expectations for, future interest rate changes;
|
|
|
•
|
availability of sufficient and cost-effective sources of liquidity or funding as and when needed;
|
|
|
•
|
unanticipated losses of one or more large depositor relationships, or other significant deposit outflows;
|
|
|
•
|
loss of key personnel or an inability to recruit appropriate talent cost-effectively;
|
|
|
•
|
greater-than-anticipated costs to support the growth of our business, including investments in technology, process improvements or other infrastructure enhancements, or greater-than-anticipated compliance or regulatory costs and burdens;
|
|
|
•
|
the impact of possible future acquisitions, if any, including the costs and burdens of integration efforts; or
|
|
|
•
|
failures or disruptions to, or compromises of, our data processing or other information or operational systems, including the potential impact of disruptions or security breaches at our third-party service providers.
|
These factors should be considered in evaluating forward-looking statements and undue reliance should not be placed on our forward-looking statements. Readers should also consider the risks, assumptions and uncertainties set forth in the “Risk Factors” section of our
Annual Report on Form 10-K for the fiscal year ended December 31, 2015
, and this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-Q, as well as those set forth in our subsequent periodic and current reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and we assume no obligation to update any of these statements in light of new information, future events or otherwise unless required under the federal securities laws.
OVERVIEW
For the
three months ended March 31, 2016
, we reported net income available to common stockholders of
$49.6 million
, an
increase
of
$8.1 million
, or
19%
, compared to
$41.5 million
for
first quarter 2015
, and a decrease of
$2.6 million
, or
5%
, compared to
$52.1 million
for
fourth quarter 2015
. Diluted earnings per share were
$0.62
, an
increase
of
19%
compared to
$0.52
per diluted share in
first quarter 2015
and a decrease from
$0.65
in the previous quarter. For the
three months ended March 31, 2016
, our annualized return on average assets was
1.15%
and our annualized return on average common equity was
11.40%
, compared with
1.07%
and
11.05%
, respectively, in the year ago quarter.
Compared to
first quarter 2015
, the
19%
increase
in earnings for the current quarter was primarily attributable to
14%
higher net interest income driven by
$1.3 billion
in average
loan growth
over the past year coupled with variable loans repricing to higher short-term rates following the December 2015 increase in the target federal funds rate. First quarter 2016 earnings also benefited from a $1.5 million tax benefit recorded in
first quarter 2016
, largely in connection with the adoption of a new accounting standard related to the accounting for income taxes associated with share-based compensation. Compared to the year ago quarter non-interest expenses increased
9%
, largely due to employee related costs. Both operating profit and efficiency ratio improved, with operating profit increasing
$10.5 million
, or
14%
, to
$83.8 million
for
first quarter 2016
compared to
$73.3 million
for
first quarter 2015
, and the efficiency ratio declining to
51.9%
for
first quarter 2016
compared to
53.1%
for
first quarter 2015
.
Net interest income for
first quarter 2016
increased
$17.5 million
compared to
first quarter 2015
, primarily driven by higher interest income on
$1.6 billion
growth
in average interest-earning assets compared to the prior year quarter and, to a lesser extent, the impact of higher short-term rates on our variable rate loan portfolio. Net interest margin was
3.30%
for
first quarter 2016
, increasing from
3.21%
for
first quarter 2015
mainly due to the increase in average loan balances and the mid-December rate rise previously mentioned. Non-interest income for the current quarter was largely unchanged from the prior year quarter, which included a one-time $4.1 million gain on the sale of our Georgia branch. The current year quarter was aided by higher syndication revenue and capital markets product revenue. As a result, net revenue increased
$17.9 million
, or
11%
, to
$174.3 million
, from $156.5 million for
first quarter 2015
. Non-interest expense increased 9% from the prior year quarter, primarily due to higher salary and employee benefit costs, including incentive compensation costs.
Total loans
grew
$191.2 million
, or
1%
, to
$13.5 billion
at
March 31, 2016
, from
$13.3 billion
at
year end 2015
, and increased
$1.3 billion
, or
11%
, from
March 31, 2015
, primarily in our commercial real estate (“CRE”) and commercial loan portfolios. Current period growth was tempered by higher than average payoffs and paydowns by existing clients. Total commercial loans and CRE loans comprised
65%
and
25%
of total loans, respectively, at
March 31, 2016
, consistent with
year end 2015
and
March 31, 2015
.
At
March 31, 2016
, nonperforming assets increased
21%
to
$73.9 million
, compared to
$61.0 million
at
December 31, 2015
with a single credit representing 64% of the increase. Nonperforming assets to total assets were
0.42%
at
March 31, 2016
, compared to
0.35%
at
December 31, 2015
. Nonperforming loans to total loans were
0.44%
at
March 31, 2016
, compared to
0.41%
at
December 31, 2015
. At
March 31, 2016
, our allowance for loan losses as a percentage of total loans was
1.23%
, compared to
1.21%
at
December 31, 2015
. Net charge-offs totaled
$1.8 million
in
first quarter 2016
as compared to
$1.4 million
in
first quarter 2015
, while the provision for loan losses, excluding covered assets, increased to
$6.4 million
in
first quarter 2016
compared to
$5.5 million
for
first quarter 2015
. The current quarter provision was impacted by loan growth and credit risk rating changes within our performing loan portfolio.
Total deposits at
March 31, 2016
,
increased
$119.3 million
, or 1%, to
$14.5 billion
from
year end 2015
, and increased
$363.1 million
, or
3%
from
March 31, 2015
with increases from a year ago in non-interest-bearing and money market deposits. Our deposit base is predominately comprised of commercial client balances, which will fluctuate from time to time based on our clients’ business and liquidity needs.
Please refer to the remaining sections of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for greater discussion of the various components of our
first quarter 2016
performance, statement of financial condition and liquidity.
RESULTS OF OPERATIONS
The following table presents selected quarterly financial data highlighting our operating performance trends over the past five quarters.
Table 1
Consolidated Financial Highlights
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended
|
|
2016
|
|
2015
|
|
March 31
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
Selected Operating Statistics
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
49,552
|
|
|
$
|
52,137
|
|
|
$
|
45,268
|
|
|
$
|
46,422
|
|
|
$
|
41,484
|
|
Effective tax rate
|
35.0
|
%
|
|
37.5
|
%
|
|
37.7
|
%
|
|
37.0
|
%
|
|
37.8
|
%
|
Net interest income
|
$
|
139,518
|
|
|
$
|
136,591
|
|
|
$
|
131,209
|
|
|
$
|
124,622
|
|
|
$
|
121,993
|
|
Fee revenue
(1)
|
33,071
|
|
|
32,619
|
|
|
30,529
|
|
|
33,060
|
|
|
32,982
|
|
Net revenue
(2)
|
174,337
|
|
|
170,445
|
|
|
163,134
|
|
|
158,717
|
|
|
156,453
|
|
Operating profit
(2)
|
83,844
|
|
|
87,425
|
|
|
77,959
|
|
|
76,820
|
|
|
73,308
|
|
Provision for loan losses
(3)
|
6,436
|
|
|
2,917
|
|
|
4,203
|
|
|
2,056
|
|
|
5,491
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
0.63
|
|
|
$
|
0.66
|
|
|
$
|
0.58
|
|
|
$
|
0.59
|
|
|
$
|
0.53
|
|
Diluted earnings per share
|
0.62
|
|
|
0.65
|
|
|
0.57
|
|
|
0.58
|
|
|
0.52
|
|
Tangible book value at period end
(2)(4)
|
$
|
21.07
|
|
|
$
|
20.25
|
|
|
$
|
19.65
|
|
|
$
|
18.88
|
|
|
$
|
18.35
|
|
Dividend payout ratio
|
1.60
|
%
|
|
1.52
|
%
|
|
1.72
|
%
|
|
1.69
|
%
|
|
1.89
|
%
|
Performance Ratios
|
|
|
|
|
|
|
|
|
|
Return on average common equity
|
11.40
|
%
|
|
12.29
|
%
|
|
11.05
|
%
|
|
11.85
|
%
|
|
11.05
|
%
|
Return on average assets
|
1.15
|
%
|
|
1.21
|
%
|
|
1.09
|
%
|
|
1.15
|
%
|
|
1.07
|
%
|
Return on average tangible common equity
(2)
|
12.16
|
%
|
|
13.13
|
%
|
|
11.85
|
%
|
|
12.75
|
%
|
|
11.94
|
%
|
Net interest margin
(2)
|
3.30
|
%
|
|
3.25
|
%
|
|
3.23
|
%
|
|
3.17
|
%
|
|
3.21
|
%
|
Efficiency ratio
(2)(5)
|
51.91
|
%
|
|
48.71
|
%
|
|
52.21
|
%
|
|
51.60
|
%
|
|
53.14
|
%
|
Credit Quality
(3)
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans to total loans
|
0.44
|
%
|
|
0.41
|
%
|
|
0.34
|
%
|
|
0.45
|
%
|
|
0.58
|
%
|
Total nonperforming assets to total assets
|
0.42
|
%
|
|
0.35
|
%
|
|
0.34
|
%
|
|
0.44
|
%
|
|
0.53
|
%
|
Allowance for loan losses to total loans
|
1.23
|
%
|
|
1.21
|
%
|
|
1.25
|
%
|
|
1.25
|
%
|
|
1.29
|
%
|
Balance Sheet Highlights
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
17,667,372
|
|
|
$
|
17,252,848
|
|
|
$
|
16,888,008
|
|
|
$
|
16,219,276
|
|
|
$
|
16,354,706
|
|
Average interest-earning assets
|
16,865,659
|
|
|
16,631,958
|
|
|
16,050,598
|
|
|
15,703,136
|
|
|
15,293,533
|
|
Loans
(3)
|
13,457,665
|
|
|
13,266,475
|
|
|
13,079,314
|
|
|
12,543,281
|
|
|
12,170,484
|
|
Allowance for loan losses
(3)
|
(165,356
|
)
|
|
(160,736
|
)
|
|
(162,868
|
)
|
|
(157,051
|
)
|
|
(156,610
|
)
|
Deposits
|
14,464,869
|
|
|
14,345,592
|
|
|
13,897,739
|
|
|
13,388,936
|
|
|
14,101,728
|
|
Noninterest-bearing demand deposits
|
4,338,177
|
|
|
4,355,700
|
|
|
4,068,816
|
|
|
3,702,377
|
|
|
3,936,181
|
|
Loans to deposits
(3)
|
93.04
|
%
|
|
92.48
|
%
|
|
94.11
|
%
|
|
93.68
|
%
|
|
86.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
2016
|
|
2015
|
|
March 31
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
Capital Ratios
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
12.56
|
%
|
|
12.37
|
%
|
|
12.28
|
%
|
|
12.41
|
%
|
|
12.29
|
%
|
Tier 1 risk-based capital
|
10.76
|
%
|
|
10.56
|
%
|
|
10.39
|
%
|
|
10.49
|
%
|
|
10.34
|
%
|
Tier 1 leverage ratio
|
10.50
|
%
|
|
10.35
|
%
|
|
10.35
|
%
|
|
10.24
|
%
|
|
10.16
|
%
|
Common equity Tier 1 ratio
|
9.76
|
%
|
|
9.54
|
%
|
|
9.35
|
%
|
|
9.41
|
%
|
|
9.23
|
%
|
Tangible common equity to tangible assets
(2)(6)
|
9.51
|
%
|
|
9.34
|
%
|
|
9.23
|
%
|
|
9.22
|
%
|
|
8.86
|
%
|
|
|
(1)
|
Computed as total non-interest income less net securities gains (losses).
|
|
|
(2)
|
This is a non-U.S. GAAP financial measure. Refer to
Table 23
for a reconciliation of non-U.S. GAAP measures to comparable U.S. GAAP measures.
|
|
|
(3)
|
Excludes covered assets.
|
|
|
(4)
|
Computed as total equity less preferred stock, goodwill and other intangibles divided by outstanding shares of common stock at end of period.
|
|
|
(5)
|
Computed as non-interest expense divided by the sum of net interest income on a tax equivalent basis (assuming a federal income tax rate of
35%
) and non-interest income.
|
|
|
(6)
|
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.
|
Net Interest Income
Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between interest income and fees earned on interest-earning assets, such as loans and investments, and interest expense incurred on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is affected by (1) the volume, pricing, mix and maturity of earning assets and interest-bearing liabilities; (2) the volume and value of noninterest-bearing sources of funds, such as noninterest-bearing deposits and equity; (3) the use of derivative instruments to manage interest rate risk; (4) the sensitivity of the balance sheet to fluctuations in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies; (5) loan repayment behavior, which affects timing of recognition of certain loan fees as well as penalties; and (6) asset quality.
Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest-earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average interest-earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds, principally noninterest-bearing demand deposits and equity, also support interest-earning assets.
The accounting policies underlying the recognition of interest income on loans, securities, and other interest-earning assets are included in
Note 1
of “Notes to Consolidated Financial Statements” contained in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2015
.
For purposes of this discussion, net interest income and any ratios or metrics that include net interest income as a component, such as net interest margin, have been adjusted to a fully tax-equivalent basis to more appropriately compare the returns on certain tax-exempt securities to those on taxable securities, assuming a federal income tax rate of
35%
. The effect of the tax-equivalent adjustment is presented at the bottom of the following table.
Table 2
summarizes the changes in our average interest-earning assets and interest-bearing liabilities as well as the average interest rates earned and paid on these assets and liabilities, respectively, for the quarters ended
March 31, 2016
and
2015
. The table also presents the trend in net interest margin on a quarterly basis for
2016
and
2015
, including the tax-equivalent yields on interest-earning assets and rates paid on interest-bearing liabilities. In addition,
Table 2
details variances in income and expense for each of the major categories of interest-earning assets and interest-bearing liabilities and indicates the extent to which such variances are attributable to volume versus yield/rate changes.
Table 2
Net Interest Income and Margin Analysis
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Attribution of Change in Net Interest Income
(1)
|
|
2016
|
|
|
2015
|
|
|
|
Average
Balance
|
|
Interest
(2)
|
|
Yield/
Rate
(%)
|
|
|
Average
Balance
|
|
Interest
(2)
|
|
Yield/
Rate
(%)
|
|
|
Volume
|
|
Yield/
Rate
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest-bearing deposits in banks
|
$
|
277,624
|
|
|
$
|
340
|
|
|
0.49
|
%
|
|
|
$
|
420,844
|
|
|
$
|
261
|
|
|
0.25
|
%
|
|
|
$
|
(111
|
)
|
|
$
|
190
|
|
|
$
|
79
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
2,696,568
|
|
|
15,210
|
|
|
2.26
|
%
|
|
|
2,362,725
|
|
|
13,556
|
|
|
2.30
|
%
|
|
|
1,886
|
|
|
(232
|
)
|
|
1,654
|
|
Tax-exempt
(3)
|
445,677
|
|
|
3,550
|
|
|
3.19
|
%
|
|
|
347,856
|
|
|
2,750
|
|
|
3.16
|
%
|
|
|
779
|
|
|
21
|
|
|
800
|
|
Total securities
|
3,142,245
|
|
|
18,760
|
|
|
2.39
|
%
|
|
|
2,710,581
|
|
|
16,306
|
|
|
2.41
|
%
|
|
|
2,665
|
|
|
(211
|
)
|
|
2,454
|
|
FHLB stock
|
27,076
|
|
|
150
|
|
|
2.19
|
%
|
|
|
28,664
|
|
|
48
|
|
|
0.67
|
%
|
|
|
(3
|
)
|
|
105
|
|
|
102
|
|
Loans, excluding covered assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
8,653,066
|
|
|
95,193
|
|
|
4.35
|
%
|
|
|
8,096,853
|
|
|
84,992
|
|
|
4.20
|
%
|
|
|
6,004
|
|
|
4,197
|
|
|
10,201
|
|
Commercial real estate
|
3,378,391
|
|
|
32,368
|
|
|
3.79
|
%
|
|
|
2,887,159
|
|
|
27,586
|
|
|
3.82
|
%
|
|
|
4,706
|
|
|
76
|
|
|
4,782
|
|
Construction
|
574,879
|
|
|
5,634
|
|
|
3.88
|
%
|
|
|
388,437
|
|
|
3,798
|
|
|
3.91
|
%
|
|
|
1,827
|
|
|
9
|
|
|
1,836
|
|
Residential
|
492,031
|
|
|
4,501
|
|
|
3.66
|
%
|
|
|
386,106
|
|
|
3,488
|
|
|
3.61
|
%
|
|
|
968
|
|
|
45
|
|
|
1,013
|
|
Personal and home equity
|
294,415
|
|
|
2,261
|
|
|
3.09
|
%
|
|
|
342,088
|
|
|
2,481
|
|
|
2.94
|
%
|
|
|
(360
|
)
|
|
140
|
|
|
(220
|
)
|
Total loans, excluding covered assets
(4)
|
13,392,782
|
|
|
139,957
|
|
|
4.14
|
%
|
|
|
12,100,643
|
|
|
122,345
|
|
|
4.05
|
%
|
|
|
13,145
|
|
|
4,467
|
|
|
17,612
|
|
Covered assets
(5)
|
25,932
|
|
|
110
|
|
|
1.71
|
%
|
|
|
32,801
|
|
|
357
|
|
|
4.41
|
%
|
|
|
(63
|
)
|
|
(184
|
)
|
|
(247
|
)
|
Total interest-earning assets
(3)
|
16,865,659
|
|
|
$
|
159,317
|
|
|
3.74
|
%
|
|
|
15,293,533
|
|
|
$
|
139,317
|
|
|
3.65
|
%
|
|
|
$
|
15,633
|
|
|
$
|
4,367
|
|
|
$
|
20,000
|
|
Cash and due from banks
|
174,649
|
|
|
|
|
|
|
|
171,330
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and covered loan losses
|
(169,243
|
)
|
|
|
|
|
|
|
(160,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
521,724
|
|
|
|
|
|
|
|
486,600
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
17,392,789
|
|
|
|
|
|
|
|
$
|
15,790,913
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
$
|
1,487,752
|
|
|
$
|
1,107
|
|
|
0.30
|
%
|
|
|
$
|
1,524,124
|
|
|
$
|
1,006
|
|
|
0.27
|
%
|
|
|
$
|
(24
|
)
|
|
$
|
125
|
|
|
$
|
101
|
|
Savings deposits
|
393,042
|
|
|
466
|
|
|
0.48
|
%
|
|
|
325,615
|
|
|
312
|
|
|
0.39
|
%
|
|
|
72
|
|
|
82
|
|
|
154
|
|
Money market accounts
|
5,999,516
|
|
|
5,896
|
|
|
0.39
|
%
|
|
|
5,538,192
|
|
|
4,298
|
|
|
0.31
|
%
|
|
|
381
|
|
|
1,217
|
|
|
1,598
|
|
Time deposits
|
2,157,421
|
|
|
5,672
|
|
|
1.05
|
%
|
|
|
2,560,036
|
|
|
5,639
|
|
|
0.89
|
%
|
|
|
(873
|
)
|
|
906
|
|
|
33
|
|
Total interest-bearing deposits
|
10,037,731
|
|
|
13,141
|
|
|
0.52
|
%
|
|
|
9,947,967
|
|
|
11,255
|
|
|
0.46
|
%
|
|
|
(444
|
)
|
|
2,330
|
|
|
1,886
|
|
Short-term borrowings
|
251,088
|
|
|
230
|
|
|
0.36
|
%
|
|
|
276,841
|
|
|
197
|
|
|
0.28
|
%
|
|
|
(19
|
)
|
|
52
|
|
|
33
|
|
Long-term debt
|
688,227
|
|
|
5,211
|
|
|
3.02
|
%
|
|
|
344,788
|
|
|
4,928
|
|
|
5.72
|
%
|
|
|
3,340
|
|
|
(3,057
|
)
|
|
283
|
|
Total interest-bearing liabilities
|
10,977,046
|
|
|
18,582
|
|
|
0.68
|
%
|
|
|
10,569,596
|
|
|
16,380
|
|
|
0.63
|
%
|
|
|
2,877
|
|
|
(675
|
)
|
|
2,202
|
|
Noninterest-bearing demand deposits
|
4,469,405
|
|
|
|
|
|
|
|
3,552,717
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
198,807
|
|
|
|
|
|
|
|
146,199
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
1,747,531
|
|
|
|
|
|
|
|
1,522,401
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
$
|
17,392,789
|
|
|
|
|
|
|
|
$
|
15,790,913
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
(3)
|
|
|
|
|
3.06
|
%
|
|
|
|
|
|
|
3.02
|
%
|
|
|
|
|
|
|
|
Contribution of noninterest-bearing sources of funds
|
|
|
|
|
0.24
|
%
|
|
|
|
|
|
|
0.19
|
%
|
|
|
|
|
|
|
|
Net interest income/margin
(3)
|
|
|
140,735
|
|
|
3.30
|
%
|
|
|
|
|
122,937
|
|
|
3.21
|
%
|
|
|
$
|
12,756
|
|
|
$
|
5,042
|
|
|
$
|
17,798
|
|
Less: tax equivalent adjustment
|
|
|
1,217
|
|
|
|
|
|
|
|
944
|
|
|
|
|
|
|
|
|
|
|
Net interest income, as reported
|
|
|
$
|
139,518
|
|
|
|
|
|
|
|
$
|
121,993
|
|
|
|
|
|
|
|
|
|
|
(footnotes on following page)
Table 2
Net Interest Income and Margin Analysis
(Continued)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Net Interest Margin Trend
|
|
2016
|
|
|
2015
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
Yield on interest-earning assets
(3)
|
3.74
|
%
|
|
3.67
|
%
|
|
3.65
|
%
|
|
3.60
|
%
|
|
3.65
|
%
|
Cost of interest-bearing liabilities
|
0.68
|
%
|
|
0.64
|
%
|
|
0.63
|
%
|
|
0.62
|
%
|
|
0.63
|
%
|
Net interest spread
(3)
|
3.06
|
%
|
|
3.03
|
%
|
|
3.02
|
%
|
|
2.98
|
%
|
|
3.02
|
%
|
Contribution of noninterest-bearing sources of funds
|
0.24
|
%
|
|
0.22
|
%
|
|
0.21
|
%
|
|
0.19
|
%
|
|
0.19
|
%
|
Net interest margin
(3)
|
3.30
|
%
|
|
3.25
|
%
|
|
3.23
|
%
|
|
3.17
|
%
|
|
3.21
|
%
|
|
|
(1)
|
For purposes of this table, changes which are not due solely to volume changes or rate changes are allocated to such categories in proportion to the absolute amounts of the change in each.
|
|
|
(2)
|
Interest income included
$7.9 million
and
$7.5 million
in net loan fees for the quarters ended
March 31, 2016
and
2015
, respectively.
|
|
|
(3)
|
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 23
, “
Non-U.S. GAAP Financial Measures
,” for a reconciliation of the effect of the tax-equivalent adjustment.
|
|
|
(4)
|
Includes loans held-for-sale and nonaccrual loans. Average loans on a nonaccrual basis for the recognition of interest income totaled
$53.7 million
and
$69.3 million
for the quarters ended
March 31, 2016
and
2015
, respectively. Interest foregone on impaired loans was estimated to be approximately
$546,000
and
$671,000
for the quarters ended
March 31, 2016
and
2015
, respectively, calculated based on the average loan portfolio yield for the respective period.
|
|
|
(5)
|
Covered interest-earning assets consist of loans acquired through a Federal Deposit Insurance Corporation (“FDIC”) assisted transaction that are subject to a loss share agreement and the related indemnification asset. Refer to the section below entitled “Covered Assets” for a detailed discussion.
|
Net interest income on a tax-equivalent basis
increased
$17.8 million
, or
15%
, to
$140.7 million
for
first quarter 2016
, compared to
$122.9 million
for
first quarter 2015
. The
growth
in interest income for
first quarter 2016
was attributable to a
$17.6 million
increase
in interest income on loans largely driven by
$1.3 billion
of
higher
average loan balances, which contributed
$13.1 million
to interest income, and the benefit from the December 2015 rate rise, which contributed
$4.5 million
to interest income. Interest expense
increased
$2.2 million
, primarily related to a
$1.9 million
increase
in deposit costs, reflecting the rate rise and
higher
average money market and savings balances. While interest rates on time deposits and interest-bearing demand deposits increased, average balances declined, offsetting the impact during the quarter.
Average interest-earning assets
grew
$1.6 billion
from the prior year period primarily driven by
$1.3 billion
of
growth
in average loan balances, with
$556.2 million
of the
growth
in the commercial loan portfolio and
$491.2 million
in the CRE portfolio, along with a
$431.7 million
increase
in average securities balances. Average interest-bearing liabilities
grew
$407.5 million
from the prior year period primarily driven by an increase in average long-term debt of
$343.4 million
as a result of increased use of long-term FHLB advances, in addition to
$89.8 million
of
growth
in average interest-bearing deposits.
Net interest margin increased to
3.30%
for
first quarter 2016
from
3.21%
for the
first quarter 2015
with improvements in loan yields partially offset by an increase in cost of funds. Overall loan yields increased by 9 basis points from
first quarter 2015
, as our largely variable rate portfolio benefited from higher short-term rates and specialty lending activity (which generally commands comparatively higher loan rates), while loan fees moderated from first quarter 2015 levels. First quarter 2015 benefited from non-recurring fee income of $875,000, which contributed 3 basis points to our loan yields. Our overall loan yields continue to be aided by our hedging program, although at a reduced level as a result of the rate rise. The 5 basis points increase in cost of funds for the quarter was driven primarily by increased deposit costs. Deposit costs increased 6 basis points from the prior year period, primarily due to increased average balances in money market and savings deposits, along with the repricing of deposits that are tied to the Federal funds effective rate following the mid-December rate increase, which deposits totaled $1.6 billion at March 31, 2016. Average noninterest-bearing demand deposits and average equity, our principal sources of noninterest-bearing funds, increased in aggregate by $1.1 billion from
first quarter 2015
, adding 5 basis points of value from
first quarter 2015
to
first quarter 2016
.
In the prolonged low interest rate environment, competition remains strong, which has influenced loan pricing and structure. As a result, we have experienced a general decline in our loan yields due to pricing compression on new loans, including within certain of our specialty businesses, and, to a lesser extent, on loan renewals. Future loan yields may be impacted by fluctuations in loan fees and interest income recognized upon recovery of interest on nonaccrual loans, acceleration of unamortized origination fees upon early payoff or refinancing, and prepayment and other fees received on certain event-driven actions in accordance with the
loan agreement. 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, which will depend on client behavior, pricing pressure within the bank marketplace and from non-bank alternatives, the mix of our funding sources, and prices for alternative sources of deposits and funds.
Non-interest Income
Non-interest income is derived from a number of sources including fees from our various commercial products and services such as the sale of derivative products through our capital markets group, treasury management services, lending and servicing and syndication activities, our asset management business, our mortgage banking business and deposit services to our retail clients.
The following table presents a break-out of these multiple sources of revenue for the periods presented.
Table 3
Non-Interest Income Analysis
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
|
% Change
|
Asset management income:
|
|
|
|
|
|
Managed fee income
|
$
|
4,146
|
|
|
$
|
3,829
|
|
|
8
|
|
Custodian fee income
|
579
|
|
|
534
|
|
|
8
|
|
Total asset management income
|
4,725
|
|
|
4,363
|
|
|
8
|
|
Mortgage banking
|
2,969
|
|
|
3,775
|
|
|
-21
|
|
Capital markets products
|
5,199
|
|
|
4,172
|
|
|
25
|
|
Treasury management
|
8,174
|
|
|
7,327
|
|
|
12
|
|
Loan, letter of credit and commitment fees
|
5,200
|
|
|
5,106
|
|
|
2
|
|
Syndication fees
|
5,434
|
|
|
2,622
|
|
|
107
|
|
Deposit service charges and fees and other income
|
1,370
|
|
|
5,617
|
|
|
-76
|
|
Subtotal fee income
|
33,071
|
|
|
32,982
|
|
|
*
|
|
Net securities gains
|
531
|
|
|
534
|
|
|
-1
|
|
Total non-interest income
|
$
|
33,602
|
|
|
$
|
33,516
|
|
|
*
|
|
Non-interest income for
first quarter 2016
totaled
$33.6 million
, compared to
$33.5 million
for
first quarter 2015
, with increases in all core fee income categories except for mortgage banking and deposit service charges and fees and other income, which included a $4.1 million gain on the sale of our Georgia branch during the first quarter 2015. Certain income sources, such as mortgage banking, capital markets products and syndication fees, are transactional in nature and are significantly impacted by market forces (e.g., interest rates have a significant impact on mortgage banking volume) and, accordingly, tend to fluctuate and generate uneven income from period to period.
Assets under management and administration (“AUMA”) are impacted by the general performance in equity and fixed income markets. If the market volatility and decrease in stock prices experienced during the first two months of 2016 were to continue throughout 2016, it could negatively impact AUMA as well as asset management fees, to the extent such fees are based on AUMA balances. The pricing on asset management accounts varies depending on the type of services provided. Custody and escrow services involve safeguarding and administering client assets but do not involve providing investment management services. These assets are considered to be “non-managed” AUMA and have a significantly lower fee structure than “managed” AUMA. Managed AUMA are assets for which we provide investment management services and fees from these assets are generally based on the market value of the assets on the last day of the prior quarter or month, which subject these fees to market volatility.
For
first quarter 2016
, asset management fee income increased
$362,000
, or
8%
, compared to
first quarter 2015
, primarily due to fees from new business added over the past year and price adjustments on certain managed asset accounts. Aggregate AUMA
March 31, 2016
increased
by
$2.3 billion
, from both
March 31, 2015
and
December 31, 2015
, largely attributable to the addition late in the first quarter 2016 of a single corporate trust account shown below in custody assets totaling $2.4 billion. This large new
account did not contribute meaningfully to fee income during the quarter because it is a non-managed account, which has a lower fee structure than a managed account, and was acquired late in the quarter. It is anticipated that this account will be reduced by approximately $2.0 billion by the end of the year as funds are disbursed or redeployed.
The following table presents the composition of AUMA as of the dates shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
As of
|
|
% Change
|
AUMA
|
|
3/31/2016
|
|
12/31/2015
|
|
3/31/2015
|
|
3/31-12/31
|
|
3/31-3/31
|
Personal managed
|
|
$
|
1,867,572
|
|
|
$
|
1,872,737
|
|
|
$
|
1,897,644
|
|
|
*
|
|
|
(2
|
)
|
Corporate and institutional managed
|
|
1,592,394
|
|
|
1,787,187
|
|
|
1,826,215
|
|
|
(11
|
)
|
|
(13
|
)
|
Total managed assets
|
|
3,459,966
|
|
|
3,659,924
|
|
|
3,723,859
|
|
|
(5
|
)
|
|
(7
|
)
|
Custody assets
(1)
|
|
6,161,827
|
|
|
3,631,149
|
|
|
3,604,333
|
|
|
70
|
|
|
71
|
|
Total AUMA
|
|
$
|
9,621,793
|
|
|
$
|
7,291,073
|
|
|
$
|
7,328,192
|
|
|
32
|
|
|
31
|
|
|
|
(1)
|
March 31, 2016 includes a $2.4 billion corporate trust account for which we do not provide investment management services, but do serve as trustee.
|
Income from our mortgage banking business, which includes gains on loans sold and certain mortgage related loan fees,
decreased
$806,000
, or
21%
, to
$3.0 million
in
first quarter 2016
compared to
$3.8 million
for
first quarter 2015
due to a decline in both the volume of loans sold and gains recognized on sale during the current quarter compared to the prior year quarter. In the prolonged low interest rate environment, there has been greater refinancing activity, particularly in
first quarter 2015
. While still active in first quarter 2016, refinancings did not reach the same levels as the prior year period. We sold $95.8 million of mortgage loans in the secondary market, generating gains of $2.6 million, in
first quarter 2016
compared to $137.1 million of mortgage loans sold, generating gains of $3.3 million, in the prior year period. During the latter part of
first quarter 2016
, we experienced strong application volume and anticipate mortgage banking income will improve in second quarter 2016 as we move into the start of the home purchase season.
The following table presents the composition of capital markets income for the past five quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
2016
|
|
2015
|
(Dollars in thousands)
|
March 31
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
Interest rate contracts
|
$
|
5,418
|
|
|
$
|
2,866
|
|
|
$
|
2,423
|
|
|
$
|
1,888
|
|
|
$
|
3,149
|
|
Foreign exchange contracts
|
1,685
|
|
|
2,297
|
|
|
1,902
|
|
|
2,362
|
|
|
1,771
|
|
Risk participation agreements
|
—
|
|
|
135
|
|
|
—
|
|
|
53
|
|
|
57
|
|
Total capital markets income, excluding credit valuation adjustment (“CVA”)
|
$
|
7,103
|
|
|
$
|
5,298
|
|
|
$
|
4,325
|
|
|
$
|
4,303
|
|
|
$
|
4,977
|
|
CVA
|
(1,904
|
)
|
|
1,043
|
|
|
(1,227
|
)
|
|
616
|
|
|
(805
|
)
|
Total capital markets income
|
$
|
5,199
|
|
|
$
|
6,341
|
|
|
$
|
3,098
|
|
|
$
|
4,919
|
|
|
$
|
4,172
|
|
Capital markets income was
$5.2 million
in
first quarter 2016
,
increasing
$1.0 million
from
first quarter 2015
, and included a
negative
$1.9 million
CVA in the current quarter compared to a
negative
CVA of
$805,000
for
first quarter 2015
. The CVA represents the credit component of fair value with regard to both client-based derivatives and the related matched derivatives with interbank dealer counterparties. Exclusive of CVA, capital markets products income
increased
$2.1 million
, or
43%
, compared to
first quarter 2015
, reflecting higher average deal sizes, longer maturities, and higher spreads for interest rate contracts, offset by slightly lower revenue and notional values in foreign exchange (“FX”) transactions. FX transactions generally provide a more stable source of fee income compared to the transactional nature of interest rate contracts, which are significantly influenced by clients’ views on the extent and timing of future interest rate movements. As shown in the table above, over the past five quarters, fees from interest rate contracts have fluctuated period to period due to both volume and size of transactions.
Treasury management income
increase
d
$847,000
, or
12%
, from
first quarter 2015
due to higher volume across our treasury management platforms. 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, with approximately 73% of our commercial clients using treasury management services at
March 31, 2016
. Cross-sell and implementation of treasury management services may lag the closing of a credit facility by, on average, three to six months.
Loan, letter of credit, and commitment fees
increased
$94,000
, or
2%
, from
first quarter 2015
, with increases in unused commitment fees and loan fees largely offset by a reduction in standby letter of credit fees. The majority of our unused commitment fees related to revolving facilities, which at
March 31, 2016
totaled $9.9 billion, of which $5.3 billion were unused. In comparison, at
March 31, 2015
, commitments related to revolving facilities totaled $9.1 billion, of which $4.9 billion were unused. The change from the prior year period reflects new client relationships since
first quarter 2015
.
Syndication fees of
$5.4 million
in
first quarter 2016
were up
$2.8 million
from
first quarter 2015
, with a single transaction contributing $1.9 million in fees for the quarter. During
first quarter 2016
, we were the lead or co-lead in 22 syndicated loan transactions, totaling $888.5 million in commitments, of which we retained $282.9 million in commitments. In the prior year period, we were the lead or co-lead in 15 syndicated loan transactions, totaling $467.1 million in commitments, while retaining $208.7 million in commitments. Syndication fees per transaction typically vary depending on, among other factors, market conditions and the size and structure of the transaction, so the aggregate level of syndication fees earned by us in a given period is not entirely correlated with our volume of syndications and our syndication fees can be expected to fluctuate from quarter to quarter. While we generally expect increased syndication opportunities as we grow our loan portfolio and client relationships, our volume of syndication transactions depends on a number of factors, including portfolio management decisions, the mix of loans originated, and liquidity and demand by other institutions for syndicated loans. We believe that a number of macroeconomic conditions, such as declining commodity prices and uncertainty about economic growth, and regulatory developments, such as enhanced regulatory focus on leveraged lending and CRE concentrations, have impacted market demand for syndicated loans, which could impact our level of syndication fees in future periods.
Non-interest Expense
Table 4
Non-Interest Expense Analysis
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
|
% Change
|
Compensation expense:
|
|
|
|
|
|
Salaries and wages
|
$
|
28,963
|
|
|
$
|
27,002
|
|
|
7
|
|
Share-based costs
|
6,357
|
|
|
5,143
|
|
|
24
|
|
Incentive compensation and commissions
|
13,307
|
|
|
11,062
|
|
|
20
|
|
Payroll taxes, insurance and retirement costs
|
9,712
|
|
|
9,154
|
|
|
6
|
|
Total compensation expense
|
58,339
|
|
|
52,361
|
|
|
11
|
|
Net occupancy and equipment expense
|
7,215
|
|
|
6,934
|
|
|
4
|
|
Technology and related costs
|
5,293
|
|
|
4,351
|
|
|
22
|
|
Marketing
|
4,404
|
|
|
3,578
|
|
|
23
|
|
Professional services
|
2,994
|
|
|
2,310
|
|
|
30
|
|
Outsourced servicing costs
|
1,840
|
|
|
1,680
|
|
|
10
|
|
Net foreclosed property expense
|
566
|
|
|
1,328
|
|
|
-57
|
|
Postage, telephone, and delivery
|
840
|
|
|
862
|
|
|
-3
|
|
Insurance
|
3,820
|
|
|
3,211
|
|
|
19
|
|
Loan and collection:
|
|
|
|
|
|
Loan origination and servicing expense
|
1,297
|
|
|
1,626
|
|
|
-20
|
|
Loan remediation expense
|
235
|
|
|
642
|
|
|
-63
|
|
Total loan and collection expense
|
1,532
|
|
|
2,268
|
|
|
-32
|
|
Other operating expense:
|
|
|
|
|
|
|
Supplies and printing
|
111
|
|
|
165
|
|
|
-33
|
|
Subscriptions and dues
|
383
|
|
|
319
|
|
|
20
|
|
Education and training
|
293
|
|
|
284
|
|
|
3
|
|
Internal travel and entertainment
|
473
|
|
|
323
|
|
|
46
|
|
Investment manager expense
|
541
|
|
|
645
|
|
|
-16
|
|
Bank charges
|
318
|
|
|
296
|
|
|
7
|
|
Intangibles amortization
|
540
|
|
|
655
|
|
|
-18
|
|
Provision for unfunded commitments
|
595
|
|
|
376
|
|
|
58
|
|
Other expenses
|
396
|
|
|
1,199
|
|
|
-67
|
|
Total other operating expenses
|
3,650
|
|
|
4,262
|
|
|
-14
|
|
Total non-interest expense
|
$
|
90,493
|
|
|
$
|
83,145
|
|
|
9
|
|
Full-time equivalent (“FTE”) employees at period end
|
1,229
|
|
|
1,165
|
|
|
5
|
|
Operating efficiency ratios:
|
|
|
|
|
|
Non-interest expense to average assets
|
2.09
|
%
|
|
2.14
|
%
|
|
|
Net overhead ratio
(1)
|
1.32
|
%
|
|
1.27
|
%
|
|
|
Efficiency ratio
(2)
|
51.91
|
%
|
|
53.14
|
%
|
|
|
Note:
Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
|
|
(1)
|
Computed as non-interest expense, less non-interest income, annualized, divided by average total assets.
|
|
|
(2)
|
Computed as non-interest expense divided by the sum of net interest income on a tax-equivalent basis and non-interest income. The efficiency ratio is presented on a tax-equivalent basis, assuming a federal income tax rate of
35%
. See
Table 23
, “
Non-U.S. GAAP Financial Measures
,” for a reconciliation of the effect of the tax-equivalent adjustment.
|
Non-interest expense
increased
by
$7.3 million
, or
9%
, in
first quarter 2016
compared to
first quarter 2015
. The increase primarily reflects higher compensation expense, technology costs, marketing costs and professional services costs. This was partially offset by a decrease in net foreclosed property expense and loan and collection expense in
first quarter 2016
compared to
first quarter 2015
.
Compensation expense, which is comprised of salary and wages, share-based costs, incentive compensation and payroll taxes, insurance and retirement costs,
increased
$6.0 million
, or
11%
, from
first quarter 2015
. Salary and wages were
up
$2.0 million
, or
7%
, primarily due to a larger employee base compared to levels at
March 31, 2015
, as well as annual compensation and promotion adjustments. Share-based costs
increased
$1.2 million
, or
24%
, attributable to a higher volume of awards granted during first quarter
2016
that met a shortened expense recognition period related to certain retirement provisions and a higher level of annual awards granted. Incentive compensation was
up
by
$2.2 million
, or
20%
, reflecting the impact of annual merit increases on a greater participant base as well as higher capital markets incentive expense which correlates with performance. Payroll taxes, insurance and retirement costs were
up
$558,000
due to higher payroll taxes and 401(k) costs associated with a higher level of incentive compensation payments in the current year period compared to the prior year period.
Technology and related costs
increased
$942,000
, or
22%
, from
$4.4 million
at
March 31, 2015
to
$5.3 million
at
March 31, 2016
largely due to increased hosting costs and software maintenance costs as we continue to develop our infrastructure and enhance functionality of our existing services.
Marketing expense
increased
$826,000
, or
23%
, as a result of our continuing client development activities and increased advertising and branding investments, including a new sponsorship with Broadway in Chicago.
Professional services expense, which includes fees paid for legal services in connection with corporate activities, accounting, and consulting services,
increased
$684,000
, or
30%
, from
first quarter 2015
, primarily due to increased consulting services usage related to risk management and technology initiatives.
Net foreclosed property expense, which includes write-downs on foreclosed properties, gains and losses on sales of foreclosed properties, and property ownership costs associated with the maintenance of foreclosed real estate (“OREO”),
declined
$762,000
, or
57%
, compared to
first quarter 2015
due to lower OREO write-downs, improved execution on sales of OREO and decreased property ownership costs as the population of OREO declined from
$15.6 million
at
March 31, 2015
, to
$14.8 million
at
March 31, 2016
with a single property added to OREO in March 2016 representing over 50% of outstanding OREO at
March 31, 2016
.
Insurance expense
increased
$609,000
, or
19%
, from
first quarter 2015
and was primarily due to higher FDIC deposit insurance premiums in 2016 resulting from overall asset growth and, to a lesser extent, an increase in the rate paid as a result of changes in the overall composition of our balance sheet.
Loan and collection expense, which consists of certain non-reimbursable costs associated with loan origination and servicing and loan remediation costs for problem and nonperforming loans,
declined
$736,000
, or
32%
, in
first quarter 2016
from
first quarter 2015
. Such decline was largely due to a decrease in loan remediation costs, as nonperforming loans were 17% lower from a year ago, and a decline in mortgage-related costs as mortgage activity was lower in
first quarter 2016
compared to
first quarter 2015
.
Other operating expenses
declined
$612,000
, or
14%
, from
first quarter 2015
. Other expenses include bank charges, costs associated with the CDARS
®
deposit product offering, intangible asset amortization, education-related costs, subscriptions, provision for unfunded commitments, and miscellaneous losses and expenses. The decline in expense during the current quarter is largely associated with market value adjustments and gain on sale on various non-marketable investments, including partnership interests in various Community Reinvestment Act investments and non-mortgage loans held-for-sale.
Our efficiency ratio was
51.9%
for
first quarter 2016
, improving from
53.1%
for
first quarter 2015
, as top-line revenue growth out-paced increases in operating costs. Aside from the impact of seasonally higher employee expenses included in the first quarter efficiency ratio, further meaningful improvement in the efficiency ratio will likely depend on a rise in short-term interest rates, which we expect would cause an increase in our net interest income without a corresponding increase to our non-interest expenses.
Income Taxes
Our provision for income taxes includes federal, state and local income tax expense. For the
three months ended March 31, 2016
, we recorded an income tax provision of
$26.7 million
on pre-tax income of
$76.2 million
(equal to a
35.0%
effective tax rate) compared to an income tax provision of
$25.2 million
on pre-tax income of
$66.7 million
for the
three months ended March 31, 2015
(equal to a
37.8%
effective tax rate). The lower tax rate in the first quarter 2016 was attributable to net tax benefits of $1.5
million recorded in the first quarter of 2016, largely in connection with the adoption of a new accounting standard related to the accounting for income taxes associated with share-based compensation.
Net deferred tax assets totaled
$90.1 million
at
March 31, 2016
. We have concluded that it is more likely than not that the deferred tax assets will be realized and, accordingly, no valuation allowance was recorded during the quarter. This conclusion was based in part on the fact that the Company had cumulative book income for financial statement purposes at
March 31, 2016
, measured on a trailing three-year basis. In addition, we considered the Company’s recent earnings history, on both a book and tax basis, and our outlook for earnings and taxable income in future periods.
For calendar year 2016, we currently expect the effective tax rate to be in the range of 36% to 37%, although a number of factors will continue to influence that estimate.
Operating Segments Results
We have three primary business segments: Banking, Asset Management, and Holding Company Activities.
Banking
The Banking operating segment is comprised of commercial and personal banking services. Commercial banking services are primarily provided to corporations and other business clients and include a wide array of lending and cash management products. Personal banking services offered to individuals, professionals, and entrepreneurs include direct lending and depository services.
Our Banking segment is the Company’s most significant segment, representing
89%
of consolidated total assets and generating nearly all of our net income. The profitability of our Banking segment is dependent on net interest income, provision for loan and covered loan losses, non-interest income (exclusive of asset management fees), and non-interest expense (exclusive of such expenses attributable to our asset management business). The net income for the Banking segment for the
three months ended March 31, 2016
, was
$54.1 million
, an
increase
of
$8.0 million
from net income of
$46.1 million
for the prior year period. The
increase
in net income for the Banking segment was primarily due to a
$17.6 million
increase
in net interest income resulting from $1.3 billion, or
11%
, in average
loan growth
since the prior year period coupled with higher short-term rates. The increase in net interest income was partially offset by a
$7.2 million
increase in non-interest expenses for the
three months ended March 31, 2016
, as compared to the prior year period, largely due to an increase in salaries and incentive compensation driven by an increase in staffing, annual salary and promotional adjustments and higher revenue-related incentive compensation costs.
Total loans for the Banking segment increased
$191.2 million
to
$13.5 billion
at
March 31, 2016
, from
$13.3 billion
at
December 31, 2015
. Total deposits were
$14.5 billion
and
$14.4 billion
at
March 31, 2016
, and
December 31, 2015
, respectively.
Asset Management
The Asset Management segment includes certain activities of our Private Wealth group, including investment management, personal trust and estate administration, custodial and escrow services, retirement account administration, and brokerage services. The private banking activities of our Private Wealth group are included with the Banking segment.
Net income from Asset Management
increased
to
$860,000
for
first quarter 2016
from
$576,000
for the prior year period. The increase was attributable to additional business added since a year ago and increase in fee structure on certain managed asset accounts. AUMA totaled
$9.6 billion
at
March 31, 2016
, compared to
$7.3 billion
at
March 31, 2015
and reflected the addition of a $2.4 billion single relationship late in the
first quarter 2016
.
Holding Company Activities
The Holding Company Activities segment consists of parent company-only activity and intersegment eliminations. The Holding Company’s most significant asset is its investment in the Bank. Undistributed earnings relating to this investment is not included in the Holding Company financial results. Holding Company financial results are represented primarily by interest expense on borrowings and operating expenses. Recurring operating expenses consist primarily of compensation expense allocated to the Holding Company and professional fees. For the
three months ended March 31, 2016
, the net loss for the Holding Company Activities segment increased to
$5.4 million
compared to a
net loss
of
$5.2 million
for the first quarter 2015. The Holding Company had
$50.4 million
in cash at
March 31, 2016
, compared to
$61.5 million
at
December 31, 2015
.
Additional information about our operating segments are also discussed in
Note 18
of “Notes to Consolidated Financial Statements” in
Item 1
of this
Form 10-Q
.
FINANCIAL CONDITION
Total assets were
$17.7 billion
at
March 31, 2016
, a
2%
increase
from total assets of
$17.3 billion
at
December 31, 2015
. Total loans were
$13.5 billion
at
March 31, 2016
, compared to
$13.3 billion
at
December 31, 2015
. Our total deposits
increased
slightly to
$14.5 billion
at
March 31, 2016
from
$14.3 billion
at
December 31, 2015
. Total stockholders’ equity
increased
4%
from
$1.7 billion
at
December 31, 2015
to
$1.8 billion
at
March 31, 2016
.
Investment Portfolio Management
We manage our investment securities portfolio to maximize the return on invested funds within acceptable risk guidelines, meet pledging and liquidity requirements, and adjust balance sheet interest rate sensitivity in an effort to protect net interest income levels against the impact of changes in interest rates. Investments in the portfolio are comprised of debt securities, primarily residential mortgage-backed securities and, to a lesser extent, state and municipal securities.
We may adjust the size and composition of our securities portfolio according to a number of factors, including expected liquidity needs, the current and forecasted interest rate environment, our actual and anticipated balance sheet growth rate, the relative value of various segments of the securities markets, and the broader economic and regulatory environment.
Debt securities that are classified as available-for-sale are carried at fair value and may be sold as part of our asset/liability management strategy in response to changes in interest rates, liquidity needs or significant prepayment risk. Unrealized gains and losses on available-for-sale securities represent the difference between the aggregate cost and fair value of the portfolio and are reported, on an after-tax basis, as a separate component of equity in accumulated other comprehensive income (“AOCI”). This balance sheet component will fluctuate as market interest rates and conditions change, with such changes affecting the aggregate fair value of the portfolio. In periods of significant market volatility, we may experience significant changes in AOCI.
Debt securities that are classified as held-to-maturity are securities for which we have the ability and intent to hold them until maturity and are accounted for using historical cost, as adjusted for amortization of premiums and accretion of discounts.
Table 5
Investment Securities Portfolio Valuation Summary
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
|
Fair
Value
|
|
Amortized
Cost
|
|
% of
Total
|
|
Fair
Value
|
|
Amortized
Cost
|
|
% of
Total
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
350,905
|
|
|
$
|
347,700
|
|
|
11
|
|
|
$
|
321,651
|
|
|
$
|
322,922
|
|
|
10
|
U.S. Agencies
|
46,787
|
|
|
46,390
|
|
|
1
|
|
|
46,098
|
|
|
46,504
|
|
|
1
|
Collateralized mortgage obligations
|
93,585
|
|
|
90,496
|
|
|
3
|
|
|
99,972
|
|
|
97,260
|
|
|
3
|
Residential mortgage-backed securities
|
878,065
|
|
|
856,515
|
|
|
27
|
|
|
829,855
|
|
|
817,006
|
|
|
27
|
State and municipal securities
|
462,506
|
|
|
449,076
|
|
|
14
|
|
|
467,790
|
|
|
458,402
|
|
|
15
|
Total available-for-sale
|
1,831,848
|
|
|
1,790,177
|
|
|
56
|
|
|
1,765,366
|
|
|
1,742,094
|
|
|
56
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
48,229
|
|
|
49,013
|
|
|
1
|
|
|
48,979
|
|
|
50,708
|
|
|
2
|
Residential mortgage-backed securities
|
1,169,322
|
|
|
1,154,838
|
|
|
35
|
|
|
1,069,572
|
|
|
1,069,746
|
|
|
34
|
Commercial mortgage-backed securities
|
252,235
|
|
|
247,980
|
|
|
8
|
|
|
228,063
|
|
|
229,722
|
|
|
7
|
State and municipal securities
|
254
|
|
|
254
|
|
|
*
|
|
|
254
|
|
|
254
|
|
|
*
|
Foreign sovereign debt
|
500
|
|
|
500
|
|
|
*
|
|
|
500
|
|
|
500
|
|
|
*
|
Other securities
|
4,103
|
|
|
4,175
|
|
|
*
|
|
|
3,873
|
|
|
4,353
|
|
|
1
|
Total held-to-maturity
|
1,474,643
|
|
|
1,456,760
|
|
|
44
|
|
|
1,351,241
|
|
|
1,355,283
|
|
|
44
|
Total securities
|
$
|
3,306,491
|
|
|
$
|
3,246,937
|
|
|
100
|
|
|
$
|
3,116,607
|
|
|
$
|
3,097,377
|
|
|
100
|
As of
March 31, 2016
, our securities portfolio totaled
$3.3 billion
, an
increase
of
6%
compared to
December 31, 2015
. During the
three months ended March 31, 2016
, purchases of securities totaled
$271.7 million
, with
$126.8 million
in the available-for-sale portfolio and
$144.8 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, state and municipal securities and residential and commercial mortgage-backed securities.
In conjunction with ongoing portfolio management and rebalancing activities, during the
three months ended March 31, 2016
, we sold
$26.7 million
in state and municipal securities, resulting in a
net securities gain
of
$531,000
.
Investments in collateralized mortgage obligations and residential and commercial mortgage-backed securities comprised
74%
of the total portfolio at
March 31, 2016
. All of the mortgage-backed securities are backed by U.S. Government agencies or issued by U.S. Government-sponsored enterprises. All residential mortgage-backed securities are composed of fixed-rate, fully-amortizing collateral with final maturities of 30 years or less.
Investments in debt instruments of state and local municipalities comprised
14%
of the total portfolio at
March 31, 2016
. This type of security has historically experienced very low default rates and provided a predictable cash flow because it generally is not subject to significant prepayment. For a portion of our state and local municipality debt instruments, insurance companies and state programs provide credit enhancement to improve the credit rating and liquidity of the issuance. Management considers underlying municipality credit strength and any credit enhancement when evaluating a purchase or sale decision.
We do not hold direct exposure to the obligations of the State of Illinois. We hold some bonds from municipalities in Illinois, but the finances of these municipalities are not primarily dependent on the finances of the State of Illinois.
At
March 31, 2016
, our reported equity reflected
unrealized net securities gains
on available-for-sale securities, net of tax, of
$25.4 million
,
an increase
of
$11.3 million
from
December 31, 2015
, primarily due to decreases in interest rates and the corresponding increase in the value of the securities. We continue to add, as needed, to the held-to-maturity portfolio to mitigate the potential future market volatility of adding bonds to the available-for-sale portfolio in a low interest rate environment.
During the year ended December 31, 2015, we identified three municipal debt securities from the same issuer totaling
$1.1 million
, which had credit rating downgrades during the period. We determined that the difference between amortized cost and fair value was other-than-temporary and accordingly, recognized the difference in our operating results at December 31, 2015. The securities were sold in January 2016 with no further loss recognized.
The following table summarizes activity in the Company’s investment securities portfolio during
2016
. There were no transfers of securities between investment categories during the year.
Table 6
Investment Portfolio Activity
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
Securities Available-for-Sale
|
|
Securities Held-to-Maturity
|
|
Balance at beginning of period
|
$
|
1,765,366
|
|
|
$
|
1,355,283
|
|
|
Additions:
|
|
|
|
|
Purchases
|
126,833
|
|
|
144,869
|
|
|
Reductions:
|
|
|
|
|
Sales proceeds
|
(26,682
|
)
|
|
—
|
|
|
Net gains on sale
|
531
|
|
|
—
|
|
|
Principal maturities, prepayments and calls, net of gains
|
(49,584
|
)
|
|
(41,308
|
)
|
|
Amortization of premiums and accretion of discounts
|
(3,015
|
)
|
|
(2,084
|
)
|
|
Total reductions
|
(78,750
|
)
|
|
(43,392
|
)
|
|
Increase in market value
|
18,399
|
|
|
—
|
|
(1)
|
Balance at end of period
|
$
|
1,831,848
|
|
|
$
|
1,456,760
|
|
|
|
|
(1)
|
The held-to-maturity portfolio is recorded at cost, with no adjustment for the
$4.0 million
unrealized loss in the portfolio at the beginning of
2016
or the
increase
in market value of
$21.9 million
for the
three months ended March 31, 2016
, respectively.
|
The following table presents the maturities of the different types of investments that we owned at
March 31, 2016
, and the corresponding interest rates.
Table 7
Maturity Distribution and Portfolio Yields
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
One Year or Less
|
|
One Year to Five
Years
|
|
Five Years to Ten Years
|
|
After 10 years
|
|
Amortized
Cost
|
|
Yield to
Maturity
|
|
Amortized
Cost
|
|
Yield to
Maturity
|
|
Amortized
Cost
|
|
Yield to
Maturity
|
|
Amortized
Cost
|
|
Yield to
Maturity
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
—
|
|
|
—
|
%
|
|
$
|
347,700
|
|
|
1.19
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
U.S. Agencies
|
—
|
|
|
—
|
%
|
|
46,390
|
|
|
1.30
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Collateralized mortgage obligations
(1)
|
6,928
|
|
|
3.40
|
%
|
|
83,568
|
|
|
3.19
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Residential mortgage-backed securities
(1)
|
661
|
|
|
4.74
|
%
|
|
445,932
|
|
|
3.24
|
%
|
|
397,023
|
|
|
2.29
|
%
|
|
12,899
|
|
|
3.01
|
%
|
State and municipal securities
(2)
|
15,861
|
|
|
2.35
|
%
|
|
172,720
|
|
|
1.97
|
%
|
|
247,891
|
|
|
2.10
|
%
|
|
12,604
|
|
|
2.32
|
%
|
Total available-for-sale
|
23,450
|
|
|
2.73
|
%
|
|
1,096,310
|
|
|
2.30
|
%
|
|
644,914
|
|
|
2.22
|
%
|
|
25,503
|
|
|
2.67
|
%
|
Securities Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
(1)
|
—
|
|
|
—
|
%
|
|
49,013
|
|
|
1.40
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Residential mortgage-backed securities
(1)
|
—
|
|
|
—
|
%
|
|
393,458
|
|
|
2.45
|
%
|
|
379,011
|
|
|
2.57
|
%
|
|
382,369
|
|
|
2.94
|
%
|
Commercial mortgage-backed securities
(1)
|
80
|
|
|
1.08
|
%
|
|
120,013
|
|
|
1.75
|
%
|
|
127,887
|
|
|
2.37
|
%
|
|
—
|
|
|
—
|
%
|
State and municipal securities
(2)
|
132
|
|
|
2.67
|
%
|
|
122
|
|
|
2.94
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Foreign sovereign debt
|
—
|
|
|
—
|
%
|
|
500
|
|
|
1.76
|
%
|
|
|
|
|
|
|
|
|
Other securities
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
4,175
|
|
|
7.01
|
%
|
|
—
|
|
|
—
|
%
|
Total held-to-maturity
|
212
|
|
|
2.07
|
%
|
|
563,106
|
|
|
2.21
|
%
|
|
511,073
|
|
|
2.56
|
%
|
|
382,369
|
|
|
2.94
|
%
|
Total securities
|
$
|
23,662
|
|
|
2.72
|
%
|
|
$
|
1,659,416
|
|
|
2.27
|
%
|
|
$
|
1,155,987
|
|
|
2.37
|
%
|
|
$
|
407,872
|
|
|
2.92
|
%
|
|
|
(1)
|
The repricing distributions and yields to maturity of collateralized mortgage obligations and mortgage-backed securities are based on average life of expected cash flows. Actual repricings and yields of the securities may differ from those reflected in the table depending upon actual interest rates and prepayment speeds.
|
|
|
(2)
|
The maturity date of state and municipal bonds is based on contractual maturity, unless the bond, based on current market prices, is deemed to have a high probability that a call right will be exercised, in which case the call date is used as the maturity date.
|
Loan Portfolio and Credit Quality (excluding covered assets)
The following discussion of our loan portfolio and credit quality excludes covered assets. Covered assets represent assets acquired through an FDIC-assisted transaction that are subject to a loss share agreement and are presented separately on the consolidated statements of financial condition. For additional discussion of covered assets, refer to “Covered Assets” below in this “Management’s Discussion and Analysis”.
Portfolio Composition
Table 8
Loan Portfolio
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
% of
Total
|
|
December 31,
2015
|
|
% of
Total
|
|
% Change in Balances
|
Commercial and industrial
|
$
|
6,812,596
|
|
|
51
|
|
$
|
6,747,389
|
|
|
51
|
|
1
|
|
Commercial – owner-occupied real estate
|
1,865,242
|
|
|
14
|
|
1,888,238
|
|
|
14
|
|
-1
|
|
Total commercial
|
8,677,838
|
|
|
65
|
|
8,635,627
|
|
|
65
|
|
—
|
|
Commercial real estate
|
2,705,694
|
|
|
20
|
|
2,629,873
|
|
|
20
|
|
3
|
|
Commercial real estate – multi-family
|
764,292
|
|
|
5
|
|
722,637
|
|
|
5
|
|
6
|
|
Total commercial real estate
|
3,469,986
|
|
|
25
|
|
3,352,510
|
|
|
25
|
|
4
|
|
Construction
|
537,304
|
|
|
4
|
|
522,263
|
|
|
4
|
|
3
|
|
Total commercial real estate and construction
|
4,007,290
|
|
|
29
|
|
3,874,773
|
|
|
29
|
|
3
|
|
Residential real estate
|
477,263
|
|
|
4
|
|
461,412
|
|
|
4
|
|
3
|
|
Home equity
|
126,096
|
|
|
1
|
|
129,317
|
|
|
1
|
|
-2
|
|
Personal
|
169,178
|
|
|
1
|
|
165,346
|
|
|
1
|
|
2
|
|
Total loans
|
$
|
13,457,665
|
|
|
100
|
|
$
|
13,266,475
|
|
|
100
|
|
1
|
|
Total loans were
$13.5 billion
at
March 31, 2016
, compared to
$13.3 billion
at
December 31, 2015
, increasing
$191.2 million
during the
three months ended March 31, 2016
, compared to our five-quarter trailing average loan growth of approximately $420.3 million at
March 31, 2016
. Much of the current period growth was in our CRE and construction loan portfolios, which
increased
$132.5 million from
year end 2015
. While overall loan growth was impacted by a higher level of payoffs during the
three months ended March 31, 2016
($508.1 million compared to our five-quarter trailing average payoffs of $450.4 million), new loans to new clients totaled
$396.6 million
. Payoffs during the first three months of 2016 were driven by market conditions for business and real estate property sales and refinancing into the long-term market. Revolving line usage on the overall loan portfolio decreased to 46% at
March 31, 2016
, from 47% at
December 31, 2015
.
Heightened competition from both bank and nonbank lenders has affected, and continues to affect, borrowers’ expectations regarding both pricing and loan structure, which may impact our growth rate due to increasing availability in the market of financing alternatives offering terms outside our pricing and risk tolerances. Our primary strategy is focused on developing new relationships that generate opportunities to provide comprehensive banking services to our clients and, accordingly, we seek to maintain a disciplined approach when pricing and structuring new credit opportunities.
Our loan growth for the quarter was driven by growth in CRE loans, which increased
$117.5 million
, and growth in our commercial and industrial loans, which increased
$42.2 million
, from
December 31, 2015
to
March 31, 2016
. Within the CRE portfolio, draws on construction loans increased $139.0 million for the quarter, which were partially offset by construction loans being moved to CRE. This is indicative of the uneven CRE loan life cycle as we are a short- and intermediate-term CRE lender. Growth in our CRE portfolio can be attributed to new client activity and increases in multi-family loans and mixed use/other loans.
We generally earn higher yields on our commercial and industrial portfolio, particularly related to our specialized lending products, such as healthcare and security alarm financing, than other segments of our loan portfolio. We also have greater potential to cross-sell other products and services, such as treasury management services, to our commercial and industrial lending clients.
In the normal course of our business, we participate in loan transactions that involve a number of banks in an effort to maintain and build client relationships while managing portfolio risk, with a view to cross-selling products and originating loans for the borrowers in the future. Although we often strive to lead or co-lead the arrangement, we also participate in transactions led by other banks when we have a relationship with, or seek to develop a relationship with, the borrower. Loan syndications assist us with decreasing credit exposure linked to individual client relationships or loan concentrations by industry, type or size. Of our
$13.5 billion
in total loans at
March 31, 2016
, we were party to $4.9 billion of loans with other financial institutions, consisting of $2.2 billion in retained balances in syndicated loans that were led or co-led by us and $2.7 billion for which we were a non-lead participant in the syndicated loan. Within this $4.9 billion portfolio, $2.9 billion of loans were shared national credits (“SNCs”), which are loan commitments of at least $20 million that are shared by three or more regulatory depository institutions, of which we are the lead or co-lead in $1.0 billion and the non-lead participant for $1.9 billion. Of the $396.6 million of new lending to
new clients during first quarter 2016, approximately $77.0 million, or 19%, were SNCs. To the extent financing opportunities we pursue exceed our risk appetite for larger credit exposures and we are not able to syndicate the loan transactions, our loan growth may be impacted.
The following table summarizes the composition of our commercial loan portfolio at
March 31, 2016
, and
December 31, 2015
based on our most significant industry segments, as classified pursuant to the North American Industrial Classification System standard industry description. These categories are based on the nature of the client’s ongoing business activity as opposed to the collateral underlying an individual loan. To the extent that a client’s underlying business activity changes, classification differences between periods will arise.
Table 9
Commercial Loan Portfolio Composition by Industry Segment
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
Manufacturing
|
$
|
1,830,084
|
|
|
21
|
|
$
|
1,810,085
|
|
|
21
|
Healthcare
|
1,707,426
|
|
|
20
|
|
1,807,764
|
|
|
21
|
Finance and insurance
|
1,368,563
|
|
|
16
|
|
1,333,363
|
|
|
15
|
Wholesale trade
|
774,917
|
|
|
9
|
|
768,571
|
|
|
9
|
Professional, scientific and technical services
|
566,940
|
|
|
7
|
|
574,278
|
|
|
7
|
Real estate, rental and leasing
|
607,346
|
|
|
7
|
|
542,437
|
|
|
6
|
Administrative, support, waste management and remediation services
|
469,752
|
|
|
5
|
|
481,827
|
|
|
5
|
Architecture, engineering and construction
|
274,190
|
|
|
3
|
|
252,351
|
|
|
3
|
Telecommunication and publishing
|
212,640
|
|
|
2
|
|
203,994
|
|
|
2
|
Retail
|
211,625
|
|
|
2
|
|
228,935
|
|
|
3
|
All other
(1)
|
654,355
|
|
|
8
|
|
632,022
|
|
|
8
|
Total commercial
(2)
|
$
|
8,677,838
|
|
|
100
|
|
$
|
8,635,627
|
|
|
100
|
|
|
(1)
|
All other consists of numerous smaller balances across a variety of industries with no category greater than 2% of total loans.
|
|
|
(2)
|
Includes owner-occupied commercial real estate of
$1.9 billion
at March 31, 2016 and December 31, 2015.
|
Our manufacturing portfolio, representing
21%
of our commercial lending portfolio and 14% of the total portfolio at
March 31, 2016
, is well diversified among sub-industry and product types. The manufacturing industry classification is a key component of our core business. During 2015, particularly in the second half of the year, and in first quarter 2016, the U.S. manufacturing sector experienced a significant slowdown, as evidenced by declines or slowing rates of growth in a number of key indicators, due in part to the economic headwinds of lower commodity prices, a strong U.S. dollar, and declining oil and gas prices. The stress currently faced by the durable goods manufacturing sector could adversely impact our existing portfolio and/or our future loan growth rate.
Our healthcare portfolio totaled $1.7 billion at March 31, 2016, down $100.3 million from $1.8 billion at December 31, 2015. The decrease was primarily a result of significant payoffs in the first quarter due to high valuations for healthcare facilities influenced by low interest expense, low energy costs, and steady employment. We have a specialized niche in the skilled nursing, assisted living, and residential care segment of the healthcare industry. Loan relationships to these providers tend to be larger extensions of credit with borrowers primarily represented by for-profit businesses. At
March 31, 2016
,
20%
of our commercial loan portfolio and
13%
of our total loan portfolio was composed of loans extended primarily to operators in this segment to finance the working capital needs and cost of facilities providing such services. The facilities securing the loans are dependent, in part, on the receipt of payments and reimbursements under government contracts for services provided. Accordingly, our clients and their ability to service this debt may be adversely impacted by the financial health of state or federal payors. In recent years, there have been reductions in the reimbursement rates in certain states and government entities are taking longer to reimburse providers. For example, in the State of Illinois, the Medicaid reimbursement rate was reduced and the budget impasse, which has resulted in the state operating without a budget since June 30, 2015, has contributed to reduced Medicaid payments to healthcare providers. Although our healthcare commercial loan portfolio is well diversified across 28 states, loans to borrowers in the State of Illinois represented our highest geographic concentration of healthcare loans at 20% of the healthcare commercial loan portfolio, or $335.4 million, as of
March 31, 2016
. The challenged financial condition of the State of Illinois has had some adverse effects
on the cash flow position of some of our Illinois-based healthcare borrowers. Despite this impact on client cash flows, to date, the healthcare loan portfolio has experienced minimal defaults and losses. We are actively monitoring the Illinois budget situation and its potential impact on our borrowers to manage the risks presented by the state’s budget problems and overall challenged financial condition.
The third largest segment of our commercial loan portfolio is the finance and insurance portfolio, which increased
$35.2 million
since
December 31, 2015
and now represents
16%
of our commercial lending portfolio at
March 31, 2016
compared to 15% at
December 31, 2015
. The increase in the portfolio was primarily due to an increase in specialty finance loans, which totaled $406.4 million as of
March 31, 2016
, up from $388.2 million at December 31, 2015. This type of lending represents loans to nonbank specialty finance lenders that provide various types of financing to their customers, such as consumer financing, auto financing, equipment financing or other types of asset-based lending. The growth in this portfolio is a result of pursuing new opportunities to add specialized industry knowledge amongst our client relationship managers, with an expanded team in 2015 and a greater presence in the market, which contributed to the growth in this sector. The current quarter growth was offset by a $69.2 million decrease in outstanding loans under bridge lines to private equity funds, which provide such funds with liquidity as a bridge to the next capital call from their investors. The terms of such loans are generally between 90 and 120 days and, given their purpose, these loans generally remain outstanding for a short period of time. Amounts outstanding under these lines generally will fluctuate from quarter to quarter given their transactional nature. At
March 31, 2016
, amounts outstanding under bridge lines totaled $170.8 million.
The following table summarizes our CRE and construction loan portfolios by collateral type at
March 31, 2016
, and
December 31, 2015
.
Table 10
Commercial Real Estate and Construction Loan Portfolios by Collateral Type
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Amount
|
|
% of
Total
|
|
Amount
|
|
% of
Total
|
Commercial Real Estate
|
|
|
|
|
|
|
|
Multi-family
|
$
|
764,292
|
|
|
22
|
|
$
|
722,637
|
|
|
22
|
Retail
|
761,470
|
|
|
22
|
|
763,179
|
|
|
23
|
Office
|
595,651
|
|
|
17
|
|
572,711
|
|
|
17
|
Healthcare
|
355,383
|
|
|
10
|
|
335,918
|
|
|
10
|
Industrial/warehouse
|
334,671
|
|
|
10
|
|
319,958
|
|
|
9
|
Land
|
241,158
|
|
|
7
|
|
247,190
|
|
|
7
|
Residential 1-4 family
|
92,252
|
|
|
3
|
|
86,214
|
|
|
3
|
Mixed use/other
|
325,109
|
|
|
9
|
|
304,703
|
|
|
9
|
Total commercial real estate
|
$
|
3,469,986
|
|
|
100
|
|
$
|
3,352,510
|
|
|
100
|
Construction
|
|
|
|
|
|
|
|
Multi-family
|
$
|
152,060
|
|
|
28
|
|
$
|
130,020
|
|
|
25
|
Healthcare
|
118,729
|
|
|
22
|
|
62,460
|
|
|
12
|
Retail
|
84,485
|
|
|
16
|
|
107,327
|
|
|
21
|
Office
|
60,259
|
|
|
11
|
|
84,459
|
|
|
16
|
Condominiums
|
42,851
|
|
|
8
|
|
37,451
|
|
|
7
|
Industrial/warehouse
|
38,631
|
|
|
7
|
|
46,530
|
|
|
9
|
Residential 1-4 family
|
18,561
|
|
|
4
|
|
21,849
|
|
|
4
|
Mixed use/other
|
21,728
|
|
|
4
|
|
32,167
|
|
|
6
|
Total construction
|
$
|
537,304
|
|
|
100
|
|
$
|
522,263
|
|
|
100
|
Of the combined CRE and construction portfolios, the three largest categories at
March 31, 2016
, were multi-family, retail and office, which represented 23%, 21% and 16%, respectively. Generally, we are a short to intermediate term real estate lender and our CRE and construction portfolio strategies focus on core real estate classes in the markets in which we operate and established
sponsors and developers with which we have prior experience, other banking relationships or the opportunity to offer comprehensive banking relationships. Within the multi-family asset type, we believe we are well diversified across property types (low-rise, mid-rise, and high-rise structures), unit types (traditional unit sizes, micro units, etc.), class (luxury class A, mid-point class B, etc.) and location. Additionally, the multi-family asset type is further diversified with a combination of stabilization of prior construction projects, existing property improvements, and stable assets with strong recurring cash flows. Payoffs during the
three months ended March 31, 2016
included property sales and refinancing into the long-term market.
Portfolio Risk Management
In conjunction with our commercial middle market focus, our lending activities sometimes involve larger credit relationships. Due to the larger size of these loans, the unexpected occurrence of an event or development with respect to one or more of these loans that adversely impacts the value of collateral securing the loan, the success of a workout strategy or our ability to return the loan to performing status could materially and adversely affect our results of operations and financial condition.
The following table summarizes our credit relationships with commitments greater than $25 million as of
March 31, 2016
, and
December 31, 2015
.
Table 11
Client Relationships with Commitments Greater Than $25 Million
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Commitments greater than $25 million
|
|
|
|
Number of client relationships
|
152
|
|
|
149
|
|
Percentage that are commercial and industrial businesses
|
87
|
%
|
|
88
|
%
|
Aggregate amount of commitments
|
$
|
5,025,246
|
|
|
$
|
4,976,666
|
|
Funded loan balances
|
$
|
2,891,082
|
|
|
$
|
2,841,801
|
|
Funded loan balances as a percent of total loan portfolio
|
21
|
%
|
|
21
|
%
|
As part of the risk-based deposit insurance assessment framework, the FDIC has established a regulatory classification of “higher-risk assets,” which include higher-risk commercial and industrial loans (funded and unfunded), construction and development (“C&D”) loans (funded and unfunded), non-traditional mortgages, and higher-risk consumer loans. As part of our overall portfolio risk management, we have developed a plan to manage our level of higher-risk assets relative to our capital position and within our overall risk appetite and generally have focused in recent periods on being selective in originating loans that are classified as higher-risk assets. The following table summarizes our higher-risk assets as of
March 31, 2016
, and
December 31, 2015
.
Table 12
(1)
Higher-Risk Assets
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Outstanding
|
|
|
Unfunded Commitment
|
|
Outstanding
|
|
|
Unfunded Commitment
|
Commercial and industrial
|
$
|
1,452,935
|
|
|
$
|
455,521
|
|
|
$
|
1,501,418
|
|
|
$
|
484,654
|
|
Construction and development
|
800,745
|
|
|
837,655
|
|
|
789,637
|
|
|
958,829
|
|
Non-traditional mortgages
|
812
|
|
|
—
|
|
|
959
|
|
|
—
|
|
Consumer
|
9,814
|
|
|
—
|
|
|
10,445
|
|
|
—
|
|
Total
|
$
|
2,264,306
|
|
|
$
|
1,293,176
|
|
|
$
|
2,302,459
|
|
|
$
|
1,443,483
|
|
|
|
(1)
|
Loan category classification is based on the FDIC’s regulatory definitions.
|
Higher-risk commercial and industrial loans include a majority of our total leveraged loan portfolio and are primarily underwritten on the recurring earnings of the borrower, where the ratio of debt-to-earnings is elevated compared to other commercial loans that are not characterized as higher-risk. Our higher-risk commercial and industrial loans are spread across multiple industries, generally command higher loan yields as a premium for underwriting the additional risk attributable to the leveraged position of the underlying
borrower, and typically have lower collateral coverage than similar commercial and industrial loans that are not classified by the FDIC as higher-risk assets. Based on our historical experience, the loss factors and the probability of default for loans underwritten with such characteristics have generally been higher than our commercial and industrial loan portfolio as a whole and we take this into account in establishing our allowance for loan losses.
Maturity and Interest Rate Sensitivity of Loan Portfolio
The following table summarizes the maturity distribution of our loan portfolio as of
March 31, 2016
, by category, as well as the interest rate sensitivity of loans in these categories that have maturities in excess of one year.
Table 13
Maturities and Sensitivities of Loans to Changes in Interest Rates
(1)
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
Due in 1 year or less
|
|
Due after 1 year through 5 years
|
|
Due after 5 years
|
|
Total
|
Commercial
|
$
|
2,138,214
|
|
|
$
|
6,328,272
|
|
|
$
|
211,352
|
|
|
$
|
8,677,838
|
|
Commercial real estate
|
1,156,498
|
|
|
2,038,821
|
|
|
274,667
|
|
|
3,469,986
|
|
Construction
|
113,176
|
|
|
422,107
|
|
|
2,021
|
|
|
537,304
|
|
Residential real estate
|
7,820
|
|
|
946
|
|
|
468,497
|
|
|
477,263
|
|
Home equity
|
10,620
|
|
|
65,893
|
|
|
49,583
|
|
|
126,096
|
|
Personal
|
123,460
|
|
|
45,521
|
|
|
197
|
|
|
169,178
|
|
Total
|
$
|
3,549,788
|
|
|
$
|
8,901,560
|
|
|
$
|
1,006,317
|
|
|
$
|
13,457,665
|
|
Loans maturing after one year:
|
|
|
|
|
|
|
|
Predetermined (fixed) interest rates
|
|
|
$
|
155,876
|
|
|
$
|
320,278
|
|
|
|
Floating interest rates
|
|
|
8,745,684
|
|
|
686,039
|
|
|
|
Total
|
|
|
$
|
8,901,560
|
|
|
$
|
1,006,317
|
|
|
|
|
|
(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
$9.4 billion
in loans maturing after one year with a floating interest rate,
$1.1 billion
are subject to interest rate floors, of which
$761.2 million
had such floors in effect at
March 31, 2016
. For further analysis and information related to interest sensitivity, see Item 3 “Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q.
Delinquent Loans, Special Mention and Potential Problem Loans, Restructured Loans and Nonperforming Assets
Loans are reported delinquent if the required principal and interest payments have not been received within 30 days of the date such payments are due. Delinquency can be driven by either failure of the borrower to make payments during the term of the loan or failure to make the final payment at maturity. The majority of our loans are not fully amortizing over the term. As a result, a sizeable final repayment is often required at maturity. If a borrower lacks refinancing options or the ability to pay the remaining principal amount, the loan may become delinquent in connection with its maturity.
Loans considered special mention loans are performing in accordance with the contractual terms, but demonstrate potential weakness that, if left unresolved, may result in deterioration in the Company’s credit position and/or the repayment prospects for the credit. Borrowers rated special mention may exhibit adverse operating trends, high leverage, tight liquidity, or other credit concerns. These loans continue to accrue interest.
Potential problem loans, like special mention loans, are loans that are performing in accordance with contractual terms, but for which management has some level of concern (greater than that of special mention loans) about the ability of the borrowers to meet existing repayment terms in future periods. These loans continue to accrue interest, but ultimate collection in full is questionable due to the same conditions that characterize a special mention credit. These credits may also have somewhat increased risk profiles as a result of the current net worth and/or paying capacity of the obligor or guarantors or the value of the collateral pledged. These loans generally have a well-defined weakness that may jeopardize collection of the debt and are characterized by the distinct
possibility that the Company may sustain some loss if the deficiencies are not resolved. Although potential problem loans require additional attention by management, they may not become nonperforming.
Nonperforming assets include nonperforming loans and OREO that has been acquired primarily through foreclosure proceedings and are awaiting disposition. Nonperforming loans consist of nonaccrual loans, including restructured loans that remain on nonaccrual. We specifically exclude restructured loans that accrue interest from our definition of nonperforming loans.
All loans are placed on nonaccrual status when principal or interest payments become 90 days past due or earlier if management deems the collectability of principal or interest to be in question prior to the loans becoming 90 days past due. Classification of a loan as nonaccrual does not necessarily preclude the ultimate collection of principal and/or interest.
As part of our ongoing risk management practices and in certain circumstances, we may extend or modify the terms of a loan in an attempt to maximize the collection of amounts due when a borrower is experiencing financial difficulties. The modification may consist of reducing the interest rate, extending the maturity date, reducing the principal balance, or other action intended to minimize potential losses and maximize our chances of a more successful recovery on a troubled loan. When we make such concessions as part of a modification, we report the loan as a troubled debt restructurings (“TDRs”) and account for the interest due in accordance with our TDR policy. Restructured loans can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the individual facts and circumstances of the borrower. The TDR is classified as an accruing TDR if the borrower has demonstrated the ability to meet the new terms of the restructured loan as evidenced by a minimum of six months of performance in compliance with the restructured terms or if the borrower’s performance prior to the restructuring or other significant events at the time of the restructuring supports returning or maintaining the loan on accrual status. TDRs accrue interest as long as the borrower complies with the revised terms and conditions and management is reasonably assured as to the collectability of principal and interest; otherwise, the restructured loan will be classified as nonaccrual. 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).
A discussion of our accounting policies for “Delinquent Loans, Special Mention and Potential Problem Loans, Restructured Loans and Nonperforming Assets” can be found in
Note 1
, “Summary of Significant Accounting Policies,” and Note 4, “Loans and Credit Quality” in the “Notes to Consolidated Financial Statements” of our
Annual Report on Form 10-K for the fiscal year ended December 31, 2015
.
The following table provides a comparison of our nonperforming assets, restructured loans accruing interest, special mention, potential problem and past due loans for the past five quarters.
Table 14
Nonperforming Assets and Restructured and Past Due Loans
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
March 31
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
41,374
|
|
|
$
|
32,794
|
|
|
$
|
18,370
|
|
|
$
|
27,845
|
|
|
$
|
38,973
|
|
Commercial real estate
|
8,242
|
|
|
8,501
|
|
|
12,041
|
|
|
13,441
|
|
|
15,619
|
|
Residential real estate
|
3,900
|
|
|
4,762
|
|
|
4,272
|
|
|
4,116
|
|
|
4,763
|
|
Personal and home equity
|
5,554
|
|
|
7,692
|
|
|
9,299
|
|
|
11,172
|
|
|
11,663
|
|
Total nonaccrual loans
|
59,070
|
|
|
53,749
|
|
|
43,982
|
|
|
56,574
|
|
|
71,018
|
|
90 days past due loans (still accruing interest)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total nonperforming loans
|
59,070
|
|
|
53,749
|
|
|
43,982
|
|
|
56,574
|
|
|
71,018
|
|
OREO
|
14,806
|
|
|
7,273
|
|
|
12,760
|
|
|
15,084
|
|
|
15,625
|
|
Total nonperforming assets
|
$
|
73,876
|
|
|
$
|
61,022
|
|
|
$
|
56,742
|
|
|
$
|
71,658
|
|
|
$
|
86,643
|
|
Nonaccrual troubled debt restructured loans
(included in nonaccrual loans)
:
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
20,285
|
|
|
$
|
25,034
|
|
|
$
|
10,674
|
|
|
$
|
7,944
|
|
|
$
|
17,333
|
|
Commercial real estate
|
7,854
|
|
|
7,619
|
|
|
9,397
|
|
|
10,638
|
|
|
12,335
|
|
Residential real estate
|
—
|
|
|
1,341
|
|
|
1,308
|
|
|
1,325
|
|
|
1,737
|
|
Personal and home equity
|
5,763
|
|
|
5,177
|
|
|
5,402
|
|
|
5,832
|
|
|
5,985
|
|
Total nonaccrual troubled debt restructured loans
|
$
|
33,902
|
|
|
$
|
39,171
|
|
|
$
|
26,781
|
|
|
$
|
25,739
|
|
|
$
|
37,390
|
|
Restructured loans accruing interest:
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
26,830
|
|
|
$
|
14,526
|
|
|
$
|
23,596
|
|
|
$
|
34,932
|
|
|
$
|
20,775
|
|
Commercial real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
177
|
|
Personal and home equity
|
2,005
|
|
|
2,020
|
|
|
2,101
|
|
|
1,754
|
|
|
1,416
|
|
Total restructured loans accruing interest
|
$
|
28,835
|
|
|
$
|
16,546
|
|
|
$
|
25,697
|
|
|
$
|
36,686
|
|
|
$
|
22,368
|
|
Special mention loans
|
$
|
121,239
|
|
|
$
|
120,028
|
|
|
$
|
146,827
|
|
|
$
|
132,441
|
|
|
$
|
102,651
|
|
Potential problem loans
|
$
|
136,322
|
|
|
$
|
132,398
|
|
|
$
|
127,950
|
|
|
$
|
137,757
|
|
|
$
|
107,038
|
|
30-89 days past due loans
|
$
|
15,732
|
|
|
$
|
9,067
|
|
|
$
|
6,420
|
|
|
$
|
2,823
|
|
|
$
|
9,217
|
|
Nonperforming loans to total loans
|
0.44
|
%
|
|
0.41
|
%
|
|
0.34
|
%
|
|
0.45
|
%
|
|
0.58
|
%
|
Nonperforming loans to total assets
|
0.33
|
%
|
|
0.31
|
%
|
|
0.26
|
%
|
|
0.35
|
%
|
|
0.43
|
%
|
Nonperforming assets to total assets
|
0.42
|
%
|
|
0.35
|
%
|
|
0.34
|
%
|
|
0.44
|
%
|
|
0.53
|
%
|
Allowance for loan losses as a percent of nonperforming loans
|
280
|
%
|
|
299
|
%
|
|
370
|
%
|
|
278
|
%
|
|
221
|
%
|
Nonperforming loans totaled
$59.1 million
at
March 31, 2016
, up 10% from
$53.7 million
at
December 31, 2015
, and down 17% from
March 31, 2015
. Nonperforming loan inflows, which are primarily composed of potential problem loans moving through the workout process (i.e., moving from potential problem to nonperforming status), were
$24.7 million
during first quarter 2016, with two credits representing approximately 60% of such inflows. The improving economic environment has provided greater opportunity to work with clients to repair and resolve credit relationships starting to exhibit signs of weakness prior to reaching greater deterioration. Nonperforming loans as a percent of total loans were
0.44%
at
March 31, 2016
, down from
0.41%
at
December 31, 2015
, and
0.58%
at
March 31, 2015
.
OREO
increased
$7.5 million
to
$14.8 million
from
$7.3 million
at
December 31, 2015
, with $8.2 million of total outstanding OREO at March 31, 2016 consisting of an individual property that transferred into OREO during the current quarter. This inflow was partially offset by sales of OREO and valuation adjustments as we continue to dispose and settle properties.
As a result of the activity described above for nonperforming loans and OREO, nonperforming assets
increased
21%
from year end 2015 to
$73.9 million
at
March 31, 2016
, and declined 15% from
March 31, 2015
. Nonperforming assets as a percentage of total assets were
0.42%
at
March 31, 2016
, compared to
0.35%
at
December 31, 2015
.
As of
March 31, 2016
, special mention and potential problem loans totaled $257.6 million, increasing $5.2 million from $252.4 million, as of December 31, 2015. Potential problem loans totaled
$136.3 million
at
March 31, 2016
, increasing $3.9 million from
$132.4 million
at
December 31, 2015
, primarily in the commercial loan portfolio. At
March 31, 2016
, commercial loans comprised $129.8 million, or 95% of total potential problems loan, with six borrowers representing over 50% of the total. Because our loan portfolio contains loans that may be larger in size, changes in the performance of larger credits may from time to time create fluctuations in our credit quality metrics, including nonperforming, special mention and potential problem loans.
The following table presents changes in our nonperforming loans for the past five quarters.
Table 15
Nonperforming Loans Rollforward
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
2016
|
|
2015
|
|
March 31
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
Nonperforming loans:
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
53,749
|
|
|
$
|
43,982
|
|
|
$
|
56,574
|
|
|
$
|
71,018
|
|
|
$
|
67,544
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
New nonaccrual loans
(1)
|
24,720
|
|
|
19,969
|
|
|
1,127
|
|
|
6,884
|
|
|
16,279
|
|
Reductions:
|
|
|
|
|
|
|
|
|
|
Return to performing status
|
(907
|
)
|
|
(614
|
)
|
|
(998
|
)
|
|
—
|
|
|
(97
|
)
|
Paydowns and payoffs, net of advances
|
(6,920
|
)
|
|
(997
|
)
|
|
(8,807
|
)
|
|
(15,800
|
)
|
|
(4,841
|
)
|
Net sales
|
—
|
|
|
(393
|
)
|
|
(1,990
|
)
|
|
(317
|
)
|
|
(2,407
|
)
|
Transfer to OREO
|
(9,294
|
)
|
|
(1,141
|
)
|
|
(954
|
)
|
|
(1,996
|
)
|
|
(2,152
|
)
|
Transfer to loans held-for-sale
|
—
|
|
|
(667
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Charge-offs
|
(2,278
|
)
|
|
(6,390
|
)
|
|
(970
|
)
|
|
(3,215
|
)
|
|
(3,308
|
)
|
Total reductions
|
(19,399
|
)
|
|
(10,202
|
)
|
|
(13,719
|
)
|
|
(21,328
|
)
|
|
(12,805
|
)
|
Balance at end of period
|
$
|
59,070
|
|
|
$
|
53,749
|
|
|
$
|
43,982
|
|
|
$
|
56,574
|
|
|
$
|
71,018
|
|
Nonaccruing troubled debt restructured loans
(
included in
nonperforming loans)
:
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
39,171
|
|
|
$
|
26,781
|
|
|
$
|
25,739
|
|
|
$
|
37,390
|
|
|
$
|
36,298
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
New nonaccrual troubled debt restructured loans
(1)
|
1,353
|
|
|
17,773
|
|
|
5,014
|
|
|
4,751
|
|
|
6,666
|
|
Reductions:
|
|
|
|
|
|
|
|
|
|
Return to performing status
|
(339
|
)
|
|
(518
|
)
|
|
(338
|
)
|
|
—
|
|
|
(78
|
)
|
Paydowns and payoffs, net of advances
|
(5,549
|
)
|
|
1,151
|
|
|
(2,000
|
)
|
|
(11,747
|
)
|
|
(2,336
|
)
|
Net sales
|
—
|
|
|
(278
|
)
|
|
(629
|
)
|
|
—
|
|
|
(140
|
)
|
Transfer to OREO
|
(681
|
)
|
|
—
|
|
|
(879
|
)
|
|
(1,960
|
)
|
|
(874
|
)
|
Charge-offs
|
(53
|
)
|
|
(5,738
|
)
|
|
(126
|
)
|
|
(2,695
|
)
|
|
(2,146
|
)
|
Total reductions
|
(6,622
|
)
|
|
(5,383
|
)
|
|
(3,972
|
)
|
|
(16,402
|
)
|
|
(5,574
|
)
|
Balance at end of period
|
$
|
33,902
|
|
|
$
|
39,171
|
|
|
$
|
26,781
|
|
|
$
|
25,739
|
|
|
$
|
37,390
|
|
|
|
(1)
|
Amounts represent loan balances as of the end of the month in which loans were classified as new nonaccrual loans.
|
Credit Quality Management and Allowance for Credit Losses
We maintain an allowance for loan losses at a level management believes is sufficient to absorb credit losses inherent in the loan portfolio at the consolidated statements of financial condition date. The allowance for loan losses is assessed quarterly and represents an accounting estimate of probable losses in the portfolio at each balance sheet date based on a review of available and relevant information at that time. The allowance contains reserves for identified probable losses relating to specific borrowing relationships that are considered to be impaired (the “specific component” of the allowance) and for probable losses inherent in the loan portfolio that have not been specifically identified (the “general allocated component” of the allowance). The general allocated component is determined using a methodology that is a function of quantitative and qualitative factors and management judgment applied to defined segments of our loan portfolio.
The accounting policies underlying the establishment and maintenance of the allowance for loan losses through provisions charged to operating expense are discussed more fully in
Note 1
of “Notes to Consolidated Financial Statements” of our
Annual Report on Form 10-K for the fiscal year ended December 31, 2015
.
The following table presents our allocation of the allowance for loan losses by loan category at the dates shown.
Table 16
Allocation of Allowance for Loan Losses
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
% of Total
|
|
December 31, 2015
|
|
% of Total
|
Commercial
|
$
|
120,688
|
|
|
73
|
|
|
$
|
117,619
|
|
|
73
|
|
Commercial real estate
|
29,957
|
|
|
18
|
|
|
27,610
|
|
|
17
|
|
Construction
|
4,931
|
|
|
3
|
|
|
5,441
|
|
|
4
|
|
Residential real estate
|
4,043
|
|
|
3
|
|
|
4,239
|
|
|
3
|
|
Home equity
|
3,426
|
|
|
2
|
|
|
3,744
|
|
|
2
|
|
Personal
|
2,311
|
|
|
1
|
|
|
2,083
|
|
|
1
|
|
Total
|
$
|
165,356
|
|
|
100
|
%
|
|
$
|
160,736
|
|
|
100
|
%
|
Specific reserve
|
$
|
6,751
|
|
|
4
|
%
|
|
$
|
7,262
|
|
|
5
|
%
|
General reserve
|
$
|
158,605
|
|
|
96
|
%
|
|
$
|
153,474
|
|
|
95
|
%
|
Recorded Investment in Loans
:
|
|
|
|
|
|
|
|
Ending balance, specific reserve
|
$
|
87,905
|
|
|
|
|
$
|
70,295
|
|
|
|
Ending balance, general allocated reserve
|
13,369,760
|
|
|
|
|
13,196,180
|
|
|
|
Total loans at period end
|
$
|
13,457,665
|
|
|
|
|
$
|
13,266,475
|
|
|
|
Specific Component of the Allowance
The specific reserve requirements are the summation of individual reserves related to impaired loans that are analyzed on a loan-by-loan basis at the balance sheet date. At
March 31, 2016
, the specific reserve component of the allowance totaled
$6.8 million
, down slightly from
$7.3 million
at
December 31, 2015
. Of the
$87.9 million
in impaired loans at
March 31, 2016
, and the
$70.3 million
in impaired loans at
December 31, 2015
,
46%
and
54%
, respectively, required a specific reserve.
General Allocated Component of the Allowance
The general allocated component of the allowance is determined using a methodology that is a function of quantitative and qualitative factors and considerations applied to segments of our loan portfolio. Our methodology applies a historical loss model that takes into account at a product level (e.g., commercial, CRE, construction, etc.) the default and loss history of similar products or sub-products using a look-back period that begins in 2010 and is updated with monthly data on a lagged quarter to the most recent period. Prior to 2015, we segregated loans by vintage based on origination year (“legacy” and “transformational,” with legacy referring to loans originated in 2007 and prior years, and transformational referring to loans originated after the implementation of our strategic growth plan in late 2007) and product type. Our current methodology no longer segregates loans by vintage and does not classify loans as legacy or transformational. In light of the small balance of legacy loans in relation to our
overall loan portfolio (approximately 4%) and the amount of time that has passed since implementing our strategic growth plan, we believe that our historical loss data since 2010 is more relevant to the inherent losses in our loan portfolio and reflective of current market conditions.
Our methodology uses our default and loss history over the look-back period to establish a probability of default (“PD”) for each product type (and, in some cases, sub-segments within a product type) and risk rating, as well as an expected loss given default (“LGD”) for each product type. For our consumer portfolio, we assign a PD and LGD to each delinquency period instead of product type. Our methodology applies the PD and LGD to the applicable loan balances and produces a loss estimate by product that is inclusive of the loss emergence period.
We assess the appropriate balance of the general allocated component of the reserve at the model loss emergence period based on a variety of internal and external quantitative and qualitative factors giving consideration to conditions that we believe are not fully reflected in the model-generated loss estimates. Topics considered in this assessment include changes in lending practices and procedures (e.g., underwriting standards) internally and in our industry, changes in business or economic conditions, changes in the nature and volume of loans, changes in staffing or management in our lending teams, changes in the quality of our results from loan reviews (which includes credit quality trends and risk rating accuracy), changes in underlying collateral values, recent portfolio performance, concentration risks, and other external factors such as legal or regulatory matters relevant to management’s assessment of required reserve levels. In certain instances, these additional factors and judgments may lead to management’s conclusion that the appropriate level of the reserve differs from the amount determined through the model-driven quantitative framework, with respect to a given product type. In determining the amount of any qualitative adjustment to be made to the quantitative model output, management may adjust the PD and/or LGD for a product type (or a sub-segment within a product type) to reflect conditions that it does not believe are reflected in historical loss rates and apply those adjusted PDs and LGDs to determine the impact on the model output, with the result used to inform management’s determination of the appropriate qualitative adjustment to be made to the general allocated component for the product type.
In our evaluation of the quantitatively-determined amount and the adequacy of the allowance at
March 31, 2016
, we considered a number of factors for each product consistent with the considerations discussed in the prior paragraph. The following describes the primary management qualitative adjustments made to each product type in determining our reserve levels at
March 31, 2016
:
|
|
•
|
Commercial
- Management increased the model output for this product type to reflect: the overall slowdown in the U.S. manufacturing industry by considering our own PD versus industry-wide default rates; increased leverage metrics on existing borrowers within the portfolio; and competitive loan structures in the industry. Management increased LGDs used for the general commercial and industrial segment to reduce the impact of recoveries relating to loans charged off in older periods. Management also increased the LGDs used for the asset-based lending sub-segment based on industry data because we do not have loss experience in recent years for this sub-segment.
|
|
|
•
|
Commercial Real Estate
- Management increased the model output to reflect: industry level default rate experience in portfolios where we lack loss experience; increased leverage metrics on existing borrowers within the portfolio; compression of capitalization rates in the industry; and competitive loan structures in the industry. Management increased LGDs to reduce the impact of recoveries relating to loans charged off in older periods. Management also adjusted PD rates in instances where calculations using historical loss experience are not expected to be representative of management’s estimated losses at the consolidated statements of financial condition date.
|
|
|
•
|
Construction
- Management adjusted the model output to reflect: industry level default rate experience in portfolios where we lack loss experience; increasing collateral valuations; and competition in the market and less stringent loan structures. Management also adjusted PD rates in instances where calculations using historical loss experience are not expected to be representative of management’s estimated losses at the consolidated statements of financial condition date.
|
|
|
•
|
Consumer
- Management increased the model output to reflect: borrowers’ credit strength and willingness to purchase homes (e.g., due to high student debt levels); and general economic conditions and interest rate trends that impact these products.
|
Management also considers 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.
In determining our reserve levels at
March 31, 2016
, we established a general reserve that includes management’s qualitative assessment discussed above, which increased the reserve to a higher output than the model’s quantitative output, in total. This judgment was influenced primarily by recent indicators in our commercial portfolio, such as the increasing leverage metrics for some existing borrowers, changes in underwriting standards, and volume and nature of loan growth, which have not yet been fully incorporated into the model output.
The general allocated component of the allowance increased by $5.1 million, or 3%, from
$153.5 million
at
December 31, 2015
, to
$158.6 million
at
March 31, 2016
. The increase in the general allocated reserve primarily reflects the
$191.2 million
growth
in the loan portfolio in first quarter 2016 and changes in the credit quality of the existing portfolio for certain sectors in the commercial portfolio, specifically in the portfolio of leveraged commercial and industrial loans, and increases in the reserve in the CRE portfolio due to current portfolio risk metrics within this product type.
The establishment of the allowance for loan losses involves a high degree of judgment and estimation which includes an inherent level of imprecision given the difficulty of identifying all the factors impacting loan repayment and the timing of when losses will actually occur. While management utilizes its best judgment and available information, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including, but not limited to, client performance, the economy, changes in interest rates and property values, and the interpretation by regulatory authorities of loan classifications.
Although we determine the amount of each element of the allowance separately and consider this process to be an important credit management tool, the entire allowance 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
March 31, 2016
, management concluded the allowance for loan losses was adequate (i.e., sufficient to absorb losses that are inherent in the portfolio at that date, including for those loans where the loss is not yet identifiable).
As an integral part of their examination process, various federal and state regulatory agencies also review the allowance for loan losses. These agencies may require that certain loan balances be classified differently or charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination.
The following table presents changes in the allowance for loan losses, excluding covered assets, for the periods presented.
Table 17
Allowance for Credit Losses and Summary of Loan Loss Experience
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
2016
|
|
2015
|
|
March 31
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
Change in allowance for loan losses:
|
|
Balance at beginning of period
|
$
|
160,736
|
|
|
$
|
162,868
|
|
|
$
|
157,051
|
|
|
$
|
156,610
|
|
|
$
|
152,498
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
Commercial
|
(78
|
)
|
|
(5,654
|
)
|
|
(661
|
)
|
|
(2,921
|
)
|
|
(2,202
|
)
|
Commercial real estate
|
(1,497
|
)
|
|
(298
|
)
|
|
(175
|
)
|
|
(98
|
)
|
|
(887
|
)
|
Residential real estate
|
(484
|
)
|
|
(166
|
)
|
|
(97
|
)
|
|
(194
|
)
|
|
(37
|
)
|
Home equity
|
(192
|
)
|
|
(260
|
)
|
|
(85
|
)
|
|
—
|
|
|
(371
|
)
|
Personal
|
(150
|
)
|
|
(15
|
)
|
|
(6
|
)
|
|
(28
|
)
|
|
(10
|
)
|
Total charge-offs
|
(2,401
|
)
|
|
(6,393
|
)
|
|
(1,024
|
)
|
|
(3,241
|
)
|
|
(3,507
|
)
|
Recoveries on loans previously charged-off:
|
|
|
|
|
|
|
|
|
|
Commercial
|
187
|
|
|
786
|
|
|
2,115
|
|
|
984
|
|
|
511
|
|
Commercial real estate
|
296
|
|
|
205
|
|
|
134
|
|
|
272
|
|
|
598
|
|
Construction
|
19
|
|
|
11
|
|
|
10
|
|
|
164
|
|
|
19
|
|
Residential real estate
|
19
|
|
|
16
|
|
|
198
|
|
|
47
|
|
|
57
|
|
Home equity
|
34
|
|
|
314
|
|
|
50
|
|
|
73
|
|
|
70
|
|
Personal
|
30
|
|
|
12
|
|
|
131
|
|
|
86
|
|
|
873
|
|
Total recoveries
|
585
|
|
|
1,344
|
|
|
2,638
|
|
|
1,626
|
|
|
2,128
|
|
Net (charge-offs) recoveries
|
(1,816
|
)
|
|
(5,049
|
)
|
|
1,614
|
|
|
(1,615
|
)
|
|
(1,379
|
)
|
Provisions charged to operating expense
|
6,436
|
|
|
2,917
|
|
|
4,203
|
|
|
2,056
|
|
|
5,491
|
|
Balance at end of period
|
$
|
165,356
|
|
|
$
|
160,736
|
|
|
$
|
162,868
|
|
|
$
|
157,051
|
|
|
$
|
156,610
|
|
Reserve for unfunded commitments
(1)
|
$
|
12,354
|
|
|
$
|
11,759
|
|
|
$
|
15,209
|
|
|
$
|
13,157
|
|
|
$
|
12,650
|
|
Allowance as a percent of loans at period end
|
1.23
|
%
|
|
1.21
|
%
|
|
1.25
|
%
|
|
1.25
|
%
|
|
1.29
|
%
|
Average loans, excluding covered assets
|
$
|
13,311,733
|
|
|
$
|
13,190,400
|
|
|
$
|
12,814,714
|
|
|
$
|
12,399,878
|
|
|
$
|
12,049,687
|
|
Ratio of net charge-offs (recoveries)(annualized) to average loans outstanding for the period
|
0.05
|
%
|
|
0.15
|
%
|
|
-0.05
|
%
|
|
0.05
|
%
|
|
0.05
|
%
|
Allowance for loan losses as a percent of nonperforming loans
|
280
|
%
|
|
299
|
%
|
|
370
|
%
|
|
278
|
%
|
|
221
|
%
|
|
|
(1)
|
Included in other liabilities on the consolidated statements of financial condition
|
Activity in the Allowance for Loan Losses
The allowance for loan losses
increase
d
$4.6 million
to
$165.4 million
at
March 31, 2016
, from
$160.7 million
at
December 31, 2015
, and was largely reflective of the $191.2 million of loan growth during the quarter. The allowance for loan losses to total loans ratio was
1.23%
at
March 31, 2016
and
1.21%
at
December 31, 2015
.
Gross charge-offs
declined
32%
to
$2.4 million
for
first quarter 2016
from
$3.5 million
for the year ago period and
declined
62%
from
$6.4 million
for
fourth quarter 2015
. CRE loans comprised
62%
of total charge-offs in
first quarter 2016
, with 93% of total CRE charge-offs in the current quarter related to an individual credit.
The provision for loan losses is the expense recognized in the consolidated statements of income to adjust the allowance for loan losses to the level deemed appropriate by management, as determined through application of our allowance methodology. The provision for loan losses for the three months ended March 31, 2016 was
$6.4 million
, up from
$2.9 million
for the prior quarter and
$5.5 million
for
first quarter 2015
, and fluctuates period to period depending on the level of loan growth and unevenness in
credit quality due to the size of individual credits. Given the relatively low level of specific reserves at
March 31, 2016
, we expect any further benefit to provision expense resulting from the release of existing specific reserves to be minimal. Accordingly, we expect our provision expense going forward to be driven by changes to the general allocated reserve component due to overall loan growth and credit performance and, if necessary, any new specific reserves that may be required.
Reserve for Unfunded Commitments
In addition to the allowance for loan losses, we maintain a reserve for unfunded commitments at a level we believe to be sufficient to absorb estimated probable losses related to unfunded credit facilities. During the
three months ended March 31, 2016
, our reserve for unfunded commitments
increased
$595,000
from
$11.8 million
at
December 31, 2015
, to
$12.4 million
and consisted of
$12.0 million
in general reserve and
$395,000
in specific reserves at
March 31, 2016
. For the
three months ended March 31, 2016
, the general reserves increased $572,000, driven by higher unfunded commitment levels and an increase in the likelihood of certain product categories to draw on unused lines and loss factors. The specific reserve remained flat compared to December 31, 2015. 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
$6.4 billion
and
$6.5 billion
at
March 31, 2016
and
December 31, 2015
, respectively. At
March 31, 2016
, unfunded commitments with maturities of less than one year approximated $1.7 billion. For further information on our unfunded commitments, refer to
Note 16
of “Notes to Consolidated Financial Statements” in
Item 1
of this Quarterly Report on
Form 10-Q
.
COVERED ASSETS
At
March 31, 2016
and
December 31, 2015
, covered assets represent acquired residential mortgage loans and foreclosed loan collateral covered under a loss share agreement with the FDIC and include an indemnification receivable representing the present value of the expected reimbursement from the FDIC related to expected losses on the covered assets. The loss share agreement will expire on September 30, 2019.
Total covered assets, net of allowance for covered loan losses,
declined
by
$1.0 million
, or
5%
, from
$21.2 million
at
December 31, 2015
to
$20.2 million
at
March 31, 2016
. The reduction was primarily attributable to $1.6 million in principal paydowns, net of advances, as well as the impact of such on the evaluation of expected cash flows and discount accretion levels. At
March 31, 2016
, the indemnification receivable totaled $1.5 million, compared to $1.7 million at
December 31, 2015
. Because the remaining covered assets largely represent single-family mortgages, we do not expect a significant change in balances from period to period. Total delinquent and nonperforming covered loans totaled $4.1 million at
March 31, 2016
, and $5.2 million at
December 31, 2015
.
FUNDING AND LIQUIDITY MANAGEMENT
We manage our liquidity position in order to meet our cash flow requirements, maintain sufficient capacity to meet our clients’ needs and accommodate fluctuations in asset and liability levels due to changes in our business operations. We also have contingency funding plans designed to allow us to operate through a period of stress when access to normal sources of funding may be constrained. As part of our asset/liability management strategy, we utilize a variety of funding sources in an effort to optimize the balance of duration risk, cost, liquidity risk and contingency planning.
We maintain liquidity at levels we believe sufficient to meet anticipated client liquidity needs, fund anticipated loan growth, and selectively purchase securities and investments. Liquid assets refer to cash on hand, Federal funds (“Fed funds”) sold and securities. Net liquid assets represent liquid assets less the amount of such assets pledged to secure deposits, repurchase agreements, FHLB advances and FRB borrowings that require collateral and to satisfy contractual obligations. Net liquid assets at the Bank were $3.2 billion and $2.9 billion at
March 31, 2016
and
December 31, 2015
, respectively.
The Bank’s principal sources of funds are commercial deposits, some of which are large institutional deposits and deposits that are classified for regulatory purposes as brokered deposits, and retail deposits. In addition to deposits, we utilize FHLB advances and other sources of funding to support our balance sheet and liquidity needs. Cash from operations is also a source of funds. The Bank’s principal uses of funds include funding growth in the loan portfolio and, to a lesser extent, our investment portfolio, which is designed to be highly liquid to serve collateral needs and support liquidity risk management. In managing our levels of cash on-hand, we consider factors such as deposit movement trends (which can be influenced by changing economic conditions, client specific needs to support their businesses, including transactions such as acquisitions and divestitures, and the overall composition of our deposit base) and other needs of the Bank.
The primary sources of funding for the Holding Company include dividends received from the Bank, intercompany tax reimbursements from the Bank, and proceeds from the issuance of senior and subordinated debt and equity. As an additional source of funding, the Holding Company has a 364-day revolving line of credit with a group of commercial banks allowing borrowings
of up to
$60.0 million
in total. As of
March 31, 2016
, no amounts were drawn on the facility. The Holding Company had
$50.4 million
in cash at
March 31, 2016
, compared to
$61.5 million
at
December 31, 2015
.
Our cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Cash flows from operating activities primarily include results of operations for the period, adjusted for items in net income that did not impact cash. Net cash provided by operating activities
increased
by
$6.6 million
from the prior year period to
$112.6 million
for the
three months ended March 31, 2016
. Cash flows from investing activities reflect the impact of growth in loans and investments acquired for our interest-earning asset portfolios, as well as asset maturities and sales. For the
three months ended March 31, 2016
, net cash used in investing activities was
$370.8 million
, compared to
$290.9 million
for the prior year period. Cash flows from financing activities include transactions and events whereby cash is obtained from and/or paid to depositors, creditors or investors. Net cash provided by financing activities for the
quarter ended March 31, 2016
, was
$345.0 million
, compared to
$718.8 million
for the prior year period. The current period reflected a net increase in FHLB advances of $230.0 million and a net increase in deposit accounts of $119.3 million.
Deposits
Our deposit base is predominately composed of middle market commercial client relationships from a diversified industry base. We offer a suite of deposit and cash management products and services that support our efforts to attract and retain commercial clients. These deposits are generated principally through the development of long-term relationships with clients. Approximately 70% of our deposits at
March 31, 2016
, were accounts managed by our commercial business groups.
Through our community banking and private wealth groups, we offer a variety of small business and personal banking products, including checking, savings and money market accounts and certificates of deposit (“CDs”). Approximately 27% of our deposits at
March 31, 2016
, were accounts managed by our community banking and private wealth groups.
Public fund balances, denoting the funds held on account for municipalities and other public entities, are included as part of our total deposits. We enter into specific agreements with certain public clients to pledge collateral, primarily securities, in support of their balances on deposit. At
March 31, 2016
, we had public funds on deposit totaling $776.9 million, or approximately 5% of our deposits. Changes in public fund balances are influenced by the tax collection activities of the various municipalities as well as the general level of interest rates.
The following table provides a comparison of deposits by category for the periods presented.
Table 18
Deposits
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
%
of Total
|
|
December 31,
2015
|
|
%
of Total
|
|
% Change in Balances
|
Noninterest-bearing demand deposits
|
$
|
4,338,177
|
|
|
30
|
|
$
|
4,355,700
|
|
|
30
|
|
—
|
|
Interest-bearing demand deposits
|
1,445,368
|
|
|
10
|
|
1,503,372
|
|
|
11
|
|
-4
|
|
Savings deposits
|
410,891
|
|
|
3
|
|
377,191
|
|
|
3
|
|
9
|
|
Money market accounts
|
6,132,695
|
|
|
42
|
|
5,919,252
|
|
|
41
|
|
4
|
|
Time deposits
|
2,137,738
|
|
|
15
|
|
2,190,077
|
|
|
15
|
|
-2
|
|
Total deposits
|
$
|
14,464,869
|
|
|
100
|
|
$
|
14,345,592
|
|
|
100
|
|
1
|
|
Total deposits at
March 31, 2016
,
increased
$119.3 million
, or 1%, to
$14.5 billion
from
year end 2015
, driven primarily by a $213.4 million increase in money market deposits, offset by decreases of $58.0 million of interest-bearing demand deposits and $52.3 million of time deposits. Total average deposit growth since year end 2015 was
$83.1 million
. Due to the predominantly commercial nature of our client base, we experience fluctuations in our deposit base from time to time due to large deposit movements in certain client accounts, such as in connection with client-specific corporate acquisitions and divestitures. Our loan to deposit ratio was
93%
at
March 31, 2016
, comparable to
92%
at
December 31, 2015
. In addition to the quarter-to-quarter fluctuations in deposit balances that we sometimes experience due to client-specific events, the nature of our commercial client base has historically led to gradually increasing deposit balances in the second half of the year compared to the first half, although there is no assurance that this historical trend will repeat in future years.
Since December 31, 2015, we have added $269.2 million in new deposits from clients in the financial services industry, such as securities broker-dealers (“BDs”) for which we serve as a program bank in their cash sweep programs (as discussed in more detail below under “Brokered Deposits”), hedge funds and fund administrators and futures commission merchants (“FCMs”). Financial services clients have a higher propensity to generate larger transactional flows than our typical commercial client, which can result in temporary deposits, especially around period ends. Furthermore, some of these deposits, particularly from hedge funds, fund administrators and FCMs, may exhibit elevated volatility due to the more complex liquidity and cash flow needs of the depositors given the nature of their businesses. This volatility can further contribute to the quarter-to-quarter fluctuations in our deposit base that we referenced in the preceding paragraph. Notwithstanding the larger transactional flows and potential for elevated volatility, we intend to continue utilizing deposits from financial services firms to meet our funding requirements from client needs, such as loan growth. In light of our loan-to-deposit levels and loan growth over the past several periods, our ability to continue growing our loan portfolio may be influenced in part by our ability to continue attracting deposits, including those from financial services clients.
Because of the predominantly commercial nature of our deposit base, including from the financial services industry, we historically have had larger average deposit balances per deposit relationship than a retail-focused bank. Furthermore, a meaningful portion of our deposit base is comprised of large commercial deposit relationships, some of which are classified as brokered deposits for regulatory purposes (as discussed in more detail below under “Brokered Deposits”). The following table presents a comparison of our large deposit relationships as of the dates shown. Of our large deposit relationships of $75 million or more shown in the table below, over half of the deposits are from financial services-related businesses.
Table 19
Large Deposit Relationships
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
March 31
|
|
December 31
|
|
March 31
|
Ten largest depositors:
|
|
|
|
|
|
Deposit amounts
|
$
|
2,127,767
|
|
|
$
|
2,229,471
|
|
|
$
|
2,143,127
|
|
Percentage of total deposits
|
15
|
%
|
|
16
|
%
|
|
15
|
%
|
Classified as brokered deposits
|
$
|
1,251,484
|
|
|
$
|
1,255,315
|
|
|
$
|
1,397,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit Relationships of $75 Million or More:
|
|
|
|
|
|
Deposit amounts
|
$
|
3,133,630
|
|
|
$
|
3,247,548
|
|
|
$
|
3,574,028
|
|
Percentage of total deposits (all relationships)
|
22
|
%
|
|
23
|
%
|
|
25
|
%
|
Percentage of total deposits (financial services businesses only)
|
14
|
%
|
|
15
|
%
|
|
13
|
%
|
Number of deposit relationships
|
21
|
|
|
22
|
|
|
25
|
|
Classified as brokered deposits
|
$
|
1,788,892
|
|
|
$
|
1,752,329
|
|
|
$
|
2,011,517
|
|
Brokered Deposits
Table 20
Brokered Deposit Composition
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
March 31
|
|
December 31
|
|
March 31
|
Noninterest-bearing demand deposits
|
$
|
324,782
|
|
|
$
|
381,723
|
|
|
$
|
264,493
|
|
Interest-bearing demand deposits
|
250,123
|
|
|
242,466
|
|
|
323,094
|
|
Savings deposits
|
1,110
|
|
|
974
|
|
|
—
|
|
Money market accounts
|
1,824,525
|
|
|
1,818,091
|
|
|
1,891,590
|
|
Time deposits:
|
|
|
|
|
|
Traditional
|
437,391
|
|
|
437,235
|
|
|
673,944
|
|
CDARS
(1)
|
197,198
|
|
|
208,086
|
|
|
458,192
|
|
Other
|
50,676
|
|
|
74,954
|
|
|
87,732
|
|
Total time deposits
|
685,265
|
|
|
720,275
|
|
|
1,219,868
|
|
Total brokered deposits
|
$
|
3,085,805
|
|
|
$
|
3,163,529
|
|
|
$
|
3,699,045
|
|
Brokered deposits as a % of total deposits
|
21
|
%
|
|
22
|
%
|
|
26
|
%
|
|
|
(1)
|
The CDARS
®
deposit program is a deposit services arrangement that effectively achieves FDIC deposit insurance for jumbo deposit relationships.
|
The regulatory definition of brokered deposits includes any non-proprietary funds deposited, or referred for deposit, with a depository institution by a third party. “Traditional” brokered time deposits primarily refer to CDs issued in wholesale amounts through a broker-dealer and held in book-entry form at The Depository Trust & Clearing Corporation as well as CDs issued through third-party auction services. The regulatory definition of brokered deposits also encompasses certain deposits that we generate through more direct relationships with third parties. Examples of these “non-traditional” brokered deposits include cash sweep programs operated by BDs with which we have entered into a contract to serve as a program bank (which are discussed in more detail below) and funds administered by service providers, such as escrow agents, title companies, mortgage servicers and property managers, on behalf of third parties. With respect to these third-party service providers, we may in some cases have additional banking relationships with them and their affiliates. Our non-traditional brokered deposits are maintained across various account types, including demand, money market and time deposits, based on the needs of our clients. We believe that many of these deposits, despite falling within the definition of brokered deposits for regulatory purposes, generally constitute a stable, cost-effective source of funding and, accordingly, from a liquidity risk management perspective, we view them differently from traditional brokered time deposits. We consider the non-traditional brokered deposits as an important component of our relationship-based commercial banking business, whereas we use traditional brokered time deposits as a source of longer-term funding to complement deposits generated through relationships with our clients. As part of our liquidity risk management program, we consider characteristics other than regulatory classification, such as pricing, volatility, duration and our relationship with the depositor, when assessing the stability and overall value of deposits to us.
Total brokered deposits, as defined for regulatory reporting purposes, represented
21%
of total deposits at
March 31, 2016
and
22%
of total deposits at
December 31, 2015
. However, traditional brokered time deposits represented only 3% of total deposits at both
March 31, 2016
and
December 31, 2015
. Traditional brokered deposits have a weighted average maturity date of approximately 2 years.
As noted above, a significant source of non-traditional brokered deposits are cash sweep programs operated by BDs. At
March 31, 2016
, and
December 31, 2015
, $1.5 billion, or approximately
49%
and 48%, respectively, of our total regulatory-defined brokered deposits consisted of deposits from cash sweep programs operated by BDs for which we serve as a program bank. Cash sweep programs enable the BDs’ brokerage clients to “sweep” their cash balances into an omnibus bank deposit account established at a third-party depository institution by the BD as agent or custodian for the benefit of its clients. The contracts governing our participation as a program bank have a specified term, set forth the pricing terms for the deposits and generally provide for minimum and maximum deposit levels that the BDs will have with us at any given time.
Unlike traditional brokered time deposits, cash sweep program deposits are typically maintained in money market accounts and may be eligible for FDIC pass-through insurance. As of
March 31, 2016
, approximately 66% of the cash sweep program deposit balances were attributable to BDs who have had a deposit relationship with us for more than four years. In
Table 19
, Large Deposit Relationships, above, $1.5 billion of cash sweep program deposits were included in the deposit amounts attributable to deposit relationships of $75.0 million or more.
Borrowings
To supplement our deposit flows, we utilize a variety of wholesale funding sources and other borrowings both to fund our operations and serve as contingency funding. We maintain access to multiple external sources of funding to assist in the prudent management of funding costs, interest rate risk, and anticipated funding needs or other considerations. In addition, in constructing our overall mix of funding sources, we also factor in our desire to have a diversity of funding sources available to us. Some of our funding sources are accessible same-day, while others require advance notice, and some sources require the pledging of collateral, while others are unsecured. Our sources of additional funding liabilities are described below:
|
|
•
|
Fed Funds Counterparty Lines
- Fed funds counterparty lines are immediately accessible uncommitted lines of credit from other financial institutions. The borrowing term is typically overnight. Availability of Fed funds lines fluctuates based on market conditions, counterparty relationship strength and the amount of excess reserve balances held by counterparties.
|
|
|
•
|
Federal Reserve Discount Window
- The discount window at the Federal Reserve Bank (the “FRB”) is an additional source of overnight funding. We maintain access to the discount window primary credit program by pledging loans as collateral. Funding availability is uncommitted and primarily dictated by the amount of loans pledged and the advance rate applied by the FRB to the pledged loans. The amount of loans pledged to the FRB can fluctuate due to the availability of loans that are eligible under the FRB’s criteria, which include stipulations of documentation requirements, credit quality, payment status and other criteria.
|
|
|
•
|
Repurchase Agreements
- Repurchase agreements are agreements to sell securities subject to an obligation to repurchase the same or similar securities at a specified maturity date, generally within 1 to 90 days from the transaction date. As of
March 31, 2016
, we do not have any outstanding repurchase agreements. We generally use repurchase agreements to supplement our short-term funding needs.
|
|
|
•
|
FHLB Advances
- As a member of the FHLB Chicago, we have access to borrowing capacity, which is uncommitted and subject to change based on the availability of acceptable collateral to pledge and the level of our investment in stock of the FHLB Chicago. FHLB advances can be either short-term or long-term borrowings. Short-term advances historically have had a term of one to three days. The
$600.0 million
in short-term FHLB advances outstanding at
March 31, 2016
represented overnight funding and was repaid on April 1, 2016. Average short-term FHLB advances for the three months ended
March 31, 2016
totaled $248.6 million.
|
|
|
•
|
Revolving Line of Credit
- The Company has a 364-day revolving line of credit with a group of commercial banks allowing us to borrow up to $60.0 million. The maturity date is
September 23, 2016
. The interest rate applied on the line of credit is, at our election, either 30-day or 90-day LIBOR plus
1.75%
or Prime minus
0.50%
. We have the option to elect to convert any amounts outstanding under the line of credit, whether at maturity or before, to an amortizing term loan, with the balance of such loan due
September 24, 2018
. We maintain the line primarily as an additional source of funding and have not drawn on it since inception.
|
|
|
•
|
Long-Term Debt, excluding FHLB Advances
- As of
March 31, 2016
, we had outstanding
$167.6 million
of variable and fixed rate unsecured junior subordinated debentures issued to
four
statutory trusts that issued trust preferred securities, which currently qualify as Tier 1 capital and mature as follows:
$8.2 million
in
2034
;
$92.8 million
in
2035
and
$66.6 million
in
2068
. We also had outstanding
$120.6 million
of fixed rate unsecured subordinated debentures, which currently qualify as Tier 2 capital and mature in
2042
.
|
In addition to the foregoing, we also have access to the brokered deposit market, through which we have numerous alternatives and significant capacity, if needed. The availability and access to the brokered deposit market is subject to market conditions, our capital levels, our counterparty strength and other factors.
The following table summarizes information regarding our outstanding borrowings and additional borrowing capacity for the periods presented:
Table 21
Borrowings
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Outstanding:
|
|
|
|
|
|
|
|
|
Short-Term
|
|
|
|
|
|
|
|
|
Federal funds
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
FRB discount window
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
Repurchase agreements
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
FHLB advances
|
600,000
|
|
|
0.22
|
%
|
|
370,000
|
|
|
0.16
|
%
|
|
Revolving line of credit
(a)
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
Other borrowings
|
—
|
|
|
—
|
%
|
|
250
|
|
|
0.20
|
%
|
|
Total short-term borrowings
(1)
|
$
|
600,000
|
|
|
|
|
$
|
370,250
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
Junior subordinated debentures
(a)
|
$
|
167,619
|
|
|
5.38
|
%
|
(2)
|
$
|
167,609
|
|
|
5.37
|
%
|
(2)
|
Subordinated debentures
(a)
|
120,619
|
|
|
7.13
|
%
|
|
120,606
|
|
|
7.13
|
%
|
|
FHLB advances
|
400,000
|
|
|
0.61
|
%
|
(3)
|
400,000
|
|
|
0.58
|
%
|
(3)
|
Total long-term borrowings
|
$
|
688,238
|
|
|
|
|
$
|
688,215
|
|
|
|
|
Unused Availability:
|
|
|
|
|
|
|
|
|
Federal funds
(4)
|
$
|
580,500
|
|
|
|
|
$
|
630,500
|
|
|
|
|
FRB discount window
(5)
|
369,811
|
|
|
|
|
384,419
|
|
|
|
|
FHLB advances
(6)
|
1,237,847
|
|
|
|
|
1,481,102
|
|
|
|
|
Revolving line of credit
|
60,000
|
|
|
|
|
60,000
|
|
|
|
|
|
|
(a)
|
Represents a borrowing at the holding company. The other borrowings are at the Bank.
|
|
|
(1)
|
Also included in short-term borrowings on the Consolidated States of Financial Condition but not included in this table are amounts related to certain loan participation agreements for loans originated by us that were classified as secured borrowings because they did not qualify for sale accounting treatment. As of
March 31, 2016
, and
December 31, 2015
, these loan participation agreements totaled
$2.4 million
and
$2.2 million
, respectively. Corresponding amounts were recorded within the loan balance on the consolidated statements of financial condition as of each of these dates.
|
|
|
(2)
|
Represents a weighted-average interest rate as of such date for our four series of outstanding junior subordinated debentures.
|
|
|
(3)
|
Represents a weighted-average interest rate as of such date for our outstanding long-term fixed-rate FHLB advances.
|
|
|
(4)
|
Our total availability of overnight Fed funds borrowings is not a committed line of credit and is dependent upon lender availability.
|
|
|
(5)
|
Our borrowing capacity changes each quarter subject to available collateral and FRB discount factors.
|
|
|
(6)
|
Our FHLB borrowing availability is subject to change based on the availability of acceptable collateral for pledging (such as loans and securities) and the level of our investment in stock of the FHLB Chicago. We would be required to invest an additional $61.9 million in FHLB Chicago stock to obtain this level of borrowing capacity.
|
CAPITAL
Equity totaled
$1.8 billion
at
March 31, 2016
,
increasing
by
$69.0 million
compared to
December 31, 2015
, primarily attributable to
$49.6 million
of net income for the
quarter ended March 31, 2016
and a $17.3 million increase in accumulated other comprehensive income, largely due to an increase in market values on our available-for-sale investment portfolio.
Shares Issued in Connection with Share-Based Compensation Plans and Stock Repurchases
We reissue treasury stock (at average cost), when available, or issue new shares to fulfill our obligation to issue shares granted pursuant to share-based compensation plans. For the
three months ended March 31, 2016
, we issued 353,559 shares of common stock (representing a combination of newly issued shares and the reissuance of treasury stock) in connection with such plans largely due to annual equity award grants and the exercise of stock options, net of forfeitures. We held
120,239
shares of voting common stock as treasury stock at
March 31, 2016
, and
2,574
shares at
December 31, 2015
.
We currently do not have a stock repurchase program in place; however, we have repurchased shares in connection with the administration of our employee benefit plans. Under the terms of these plans, we accept shares of common stock from plan participants if they elect to surrender previously-owned shares upon exercise of options to cover the exercise price or, in the case of both restricted shares of common stock or stock options, the withholding of shares to satisfy tax withholding obligations associated with the vesting of restricted shares or exercise of stock options. For the
three months ended March 31, 2016
, we repurchased 127,832 shares of common stock at an average price of $36.47 per share.
Dividends
We declared dividends of
$0.01
per common share during
first quarter 2016
, unchanged from
first quarter 2015
. Based on our closing stock price on
March 31, 2016
, of
$38.60
per share, the annualized dividend yield on our common stock was
0.10%
. The dividend payout ratio, which represents the percentage of common dividends declared to stockholders to basic earnings per share, was
1.60%
for
first quarter 2016
compared to
1.89%
for
first quarter 2015
. While we have no current plans to raise the amount of the dividends currently paid 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 our
Annual Report on Form 10-K for the fiscal year ended December 31, 2015
.
Capital Management
Under applicable regulatory capital adequacy guidelines, the Company and the Bank are subject to various capital requirements adopted and administered by the federal banking agencies. These guidelines specify minimum capital ratios calculated in accordance with the definitions in the guidelines, including the leverage ratio, which is Tier 1 capital as a percentage of adjusted average assets, and the Tier 1 risk-based capital, common equity Tier 1 and the total risk-based capital ratios, which are calculated based on risk-weighted assets and off-balance sheet items that have been weighted according to broad risk categories.
In addition to the minimum risk-based capital requirements, we are required to maintain a minimum capital conservation buffer, in the form of common equity Tier 1 capital, in order to avoid restrictions on capital distributions (including dividends and stock repurchases) and discretionary bonuses to senior executive management. The required amount of the capital conservation buffer is being phased-in, beginning at 0.625% on January 1, 2016 and increasing by an additional 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019. We have included the 0.625% increase for 2016 in our minimum capital adequacy ratios in the table below. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. As of
March 31, 2016
, the Company and the Bank would meet all capital adequacy requirements on a fully phased-in basis as if all such requirements were currently in effect.
To satisfy safety and soundness standards, banking institutions are expected to maintain capital levels in excess of the regulatory minimums depending on the risk inherent in the balance sheet, regulatory expectations and the changing risk profile of business activities. Under our capital management policy, we conduct periodic stress testing of our capital adequacy and target capital ratios at levels above regulatory minimums that we believe are appropriate based on various other risk considerations, including the current operating and economic environment and outlook, internal risk guidelines, and our strategic objectives as well as regulatory expectations.
Table 22
Capital Measurements
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
(1)
|
|
FRB Guidelines
For Minimum
Regulatory Capital Plus Capital Conservation Buffer
|
|
Regulatory Minimum
For “Well-Capitalized”
under FDICIA
|
|
March 31,
2016
|
|
December 31,
2015
|
|
Ratio
|
|
Excess Over
Regulatory
Minimum at
3/31/16
|
|
Ratio
|
|
Excess Over
“Well
Capitalized”
under
FDICIA at
3/31/16
|
Regulatory capital ratios:
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital:
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
12.56
|
%
|
|
12.37
|
%
|
|
8.625
|
%
|
|
$
|
663,287
|
|
|
n/a
|
|
|
n/a
|
|
The PrivateBank
|
12.18
|
|
|
11.91
|
|
|
n/a
|
|
|
n/a
|
|
|
10.00
|
%
|
|
$
|
366,813
|
|
Tier 1 risk-based capital:
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
10.76
|
|
|
10.56
|
|
|
6.625
|
%
|
|
696,411
|
|
|
n/a
|
|
|
n/a
|
|
The PrivateBank
|
11.09
|
|
|
10.84
|
|
|
n/a
|
|
|
n/a
|
|
|
8.00
|
%
|
|
520,234
|
|
Tier 1 leverage:
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
10.50
|
|
|
10.35
|
|
|
4.000
|
%
|
|
1,121,915
|
|
|
n/a
|
|
|
n/a
|
|
The PrivateBank
|
10.82
|
|
|
10.62
|
|
|
n/a
|
|
|
n/a
|
|
|
5.00
|
%
|
|
1,004,440
|
|
Common equity Tier 1:
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
9.76
|
|
|
9.54
|
|
|
5.125
|
%
|
|
781,532
|
|
|
n/a
|
|
|
n/a
|
|
The PrivateBank
|
11.09
|
|
|
10.84
|
|
|
n/a
|
|
|
n/a
|
|
|
6.50
|
%
|
|
772,733
|
|
Other capital ratios (consolidated)
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity to tangible assets
|
9.51
|
|
|
9.33
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Computed in accordance with the applicable regulations of the FRB in effect as of the respective reporting periods.
|
|
|
(2)
|
Ratio is not subject to formal FRB regulatory guidance and is a non-U.S. GAAP financial measure. Refer to
Table 23
, “Non-U.S. GAAP Financial Measures” for a reconciliation from non-U.S. GAAP to U.S. GAAP presentation.
|
n/a Not applicable.
As of
March 31, 2016
, all of our
$167.6 million
of outstanding junior subordinated debentures held by trusts that issued trust preferred securities, representing 10% of Tier 1 capital, are included in Tier 1 capital. The Tier 1 qualifying amount is limited to 25% of Tier 1 capital as defined under FRB regulations. In the event we make certain acquisitions, the Tier 1 capital treatment for these instruments could be subject to the phase-out schedule for bank holding companies that had greater than $15 billion in total assets at the time the Dodd-Frank Act was adopted. All of our outstanding trust preferred securities are redeemable by us at any time, subject to receipt of required regulatory approvals and, in the case of the remaining
$66.6 million
of 10% Debentures issued by PrivateBancorp Capital Trust IV, compliance with the terms of the replacement capital covenant. We continue to evaluate market conditions and other factors in determining whether to redeem any of the remaining outstanding instruments.
For a full description of our junior subordinated debentures and subordinated debt, refer to Notes
9
and
10
of “Notes to Consolidated Financial Statements” in
Item 1
of this
Form 10-Q
.
NON-U.S. GAAP FINANCIAL MEASURES
This report
contains both U.S. GAAP and non-U.S. GAAP based financial measures. These non-U.S. GAAP financial measures include net interest income, net interest margin, net revenue, operating profit, and efficiency ratio all on a fully taxable-equivalent basis, return on average tangible common equity, tangible common equity to tangible assets, and tangible book value. We believe that presenting these non-U.S. GAAP financial measures will provide information useful to investors in understanding our underlying operational performance, our business, and performance trends and facilitates comparisons with the performance of others in the banking industry.
We use net interest income on a taxable-equivalent basis in calculating various performance measures by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments assuming a 35% tax rate. Management believes this measure to be the preferred industry measurement of net interest income as it enhances comparability to net interest income arising from taxable and tax-exempt sources, and accordingly believes that providing this measure may be useful for peer comparison purposes.
In addition to capital ratios defined by banking regulators, we also consider various measures when evaluating capital utilization and adequacy, including return on average tangible common equity, tangible common equity to tangible assets, and tangible book value. These calculations are intended to complement the capital ratios defined by banking regulators for both absolute and comparative purposes. All of these measures exclude the ending balances of goodwill and other intangibles while certain of these ratios exclude preferred capital components. Because U.S. GAAP does not include capital ratio measures, we believe there are no comparable U.S. GAAP financial measures to these ratios. We believe these non-U.S. GAAP financial measures are relevant because they provide information that is helpful in assessing the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of our capitalization to other similar companies. However, because there are no standardized definitions for these ratios, our calculations may not be comparable with other companies.
Non-U.S. GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-U.S. GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyses of results as reported under U.S. GAAP. As a result, we encourage readers to consider our Consolidated Financial Statements in their entirety and not to rely on any single financial measure.
The following table reconciles non-U.S. GAAP financial measures to U.S. GAAP.
Table 23
Non-U.S. GAAP Financial Measures
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
2016
|
|
2015
|
|
March 31
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
Taxable-equivalent net interest income
|
|
|
|
|
|
|
|
|
|
U.S. GAAP net interest income
|
$
|
139,518
|
|
|
$
|
136,591
|
|
|
$
|
131,209
|
|
|
$
|
124,622
|
|
|
$
|
121,993
|
|
Taxable-equivalent adjustment
|
1,217
|
|
|
1,206
|
|
|
1,136
|
|
|
1,036
|
|
|
944
|
|
Taxable-equivalent net interest income
(a)
|
$
|
140,735
|
|
|
$
|
137,797
|
|
|
$
|
132,345
|
|
|
$
|
125,658
|
|
|
$
|
122,937
|
|
Average Earning Assets
(b)
|
$
|
16,865,659
|
|
|
$
|
16,631,958
|
|
|
$
|
16,050,598
|
|
|
$
|
15,703,136
|
|
|
$
|
15,293,533
|
|
Net Interest Margin
((a)annualized) / (b)
|
3.30
|
%
|
|
3.25
|
%
|
|
3.23
|
%
|
|
3.17
|
%
|
|
3.21
|
%
|
Net Revenue
|
|
|
|
|
|
|
|
|
|
Taxable-equivalent net interest income
|
$
|
140,735
|
|
|
$
|
137,797
|
|
|
$
|
132,345
|
|
|
$
|
125,658
|
|
|
$
|
122,937
|
|
U.S. GAAP non-interest income
|
33,602
|
|
|
32,648
|
|
|
30,789
|
|
|
33,059
|
|
|
33,516
|
|
Net revenue
(c)
|
$
|
174,337
|
|
|
$
|
170,445
|
|
|
$
|
163,134
|
|
|
$
|
158,717
|
|
|
$
|
156,453
|
|
Operating Profit
|
|
|
|
|
|
|
|
|
|
U.S. GAAP income before income taxes
|
$
|
76,225
|
|
|
$
|
83,388
|
|
|
$
|
72,626
|
|
|
$
|
73,668
|
|
|
$
|
66,718
|
|
Provision for loan and covered loan losses
|
6,402
|
|
|
2,831
|
|
|
4,197
|
|
|
2,116
|
|
|
5,646
|
|
Taxable-equivalent adjustment
|
1,217
|
|
|
1,206
|
|
|
1,136
|
|
|
1,036
|
|
|
944
|
|
Operating profit
|
$
|
83,844
|
|
|
$
|
87,425
|
|
|
$
|
77,959
|
|
|
$
|
76,820
|
|
|
$
|
73,308
|
|
Efficiency Ratio
|
|
|
|
|
|
|
|
|
|
U.S. GAAP non-interest expense
(d)
|
$
|
90,493
|
|
|
$
|
83,020
|
|
|
$
|
85,175
|
|
|
$
|
81,897
|
|
|
$
|
83,145
|
|
Net revenue
|
$
|
174,337
|
|
|
$
|
170,445
|
|
|
$
|
163,134
|
|
|
$
|
158,717
|
|
|
$
|
156,453
|
|
Efficiency ratio
(d) / (c)
|
51.91
|
%
|
|
48.71
|
%
|
|
52.21
|
%
|
|
51.60
|
%
|
|
53.14
|
%
|
Adjusted Net Income
|
|
|
|
|
|
|
|
|
|
U.S. GAAP net income available to common stockholders
|
$
|
49,552
|
|
|
$
|
52,137
|
|
|
$
|
45,268
|
|
|
$
|
46,422
|
|
|
$
|
41,484
|
|
Amortization of intangibles, net of tax
|
331
|
|
|
357
|
|
|
353
|
|
|
398
|
|
|
397
|
|
Adjusted net income
(e)
|
$
|
49,883
|
|
|
$
|
52,494
|
|
|
$
|
45,621
|
|
|
$
|
46,820
|
|
|
$
|
41,881
|
|
Average Tangible Common Equity
|
|
|
|
|
|
|
|
|
|
U.S. GAAP average total equity
|
$
|
1,747,531
|
|
|
$
|
1,683,484
|
|
|
$
|
1,625,982
|
|
|
$
|
1,571,896
|
|
|
$
|
1,522,401
|
|
Less: average goodwill
|
94,041
|
|
|
94,041
|
|
|
94,041
|
|
|
94,041
|
|
|
94,041
|
|
Less: average other intangibles
|
3,153
|
|
|
3,711
|
|
|
4,291
|
|
|
4,897
|
|
|
5,551
|
|
Average tangible common equity
(f)
|
$
|
1,650,337
|
|
|
$
|
1,585,732
|
|
|
$
|
1,527,650
|
|
|
$
|
1,472,958
|
|
|
$
|
1,422,809
|
|
Return on average tangible common equity
((e) annualized) / (f)
|
12.16
|
%
|
|
13.13
|
%
|
|
11.85
|
%
|
|
12.75
|
%
|
|
11.94
|
%
|
Table 23
Non-U.S. GAAP Financial Measures
(Continued)
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
2016
|
|
2015
|
|
March 31
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
Tangible Common Equity
|
|
|
|
|
|
|
|
|
|
U.S. GAAP total equity
|
$
|
1,767,991
|
|
|
$
|
1,698,951
|
|
|
$
|
1,647,999
|
|
|
$
|
1,584,796
|
|
|
$
|
1,539,429
|
|
Less: goodwill
|
94,041
|
|
|
94,041
|
|
|
94,041
|
|
|
94,041
|
|
|
94,041
|
|
Less: other intangibles
|
2,890
|
|
|
3,430
|
|
|
4,008
|
|
|
4,586
|
|
|
5,230
|
|
Tangible common equity
(g)
|
$
|
1,671,060
|
|
|
$
|
1,601,480
|
|
|
$
|
1,549,950
|
|
|
$
|
1,486,169
|
|
|
$
|
1,440,158
|
|
Tangible Assets
|
|
|
|
|
|
|
|
|
|
U.S. GAAP total assets
(1)
|
$
|
17,667,372
|
|
|
$
|
17,252,848
|
|
|
$
|
16,888,008
|
|
|
$
|
16,219,276
|
|
|
$
|
16,354,706
|
|
Less: goodwill
|
94,041
|
|
|
94,041
|
|
|
94,041
|
|
|
94,041
|
|
|
94,041
|
|
Less: other intangibles
|
2,890
|
|
|
3,430
|
|
|
4,008
|
|
|
4,586
|
|
|
5,230
|
|
Tangible assets
(1)
(h)
|
$
|
17,570,441
|
|
|
$
|
17,155,377
|
|
|
$
|
16,789,959
|
|
|
$
|
16,120,649
|
|
|
$
|
16,255,435
|
|
Period-end Common Shares Outstanding
(i)
|
79,322
|
|
|
79,097
|
|
|
78,863
|
|
|
78,717
|
|
|
78,494
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
Tangible common equity to tangible assets
(g) / (h)
|
9.51
|
%
|
|
9.34
|
%
|
|
9.23
|
%
|
|
9.22
|
%
|
|
8.86
|
%
|
Tangible book value
(g) / (i)
|
$
|
21.07
|
|
|
$
|
20.25
|
|
|
$
|
19.65
|
|
|
$
|
18.88
|
|
|
$
|
18.35
|
|
|
|
(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.
|
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), and our accounting policies are consistent with predominant practices in the financial services industry. Critical accounting policies are those policies that require management to make the most significant estimates, assumptions, and judgments based on information available at the date of the financial statements that affect the amounts reported in the financial statements and accompanying notes. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the consolidated financial statements. Management has determined that our accounting policies with respect to the allowance for loan losses, goodwill and intangible assets, income taxes and fair value measurements are the accounting areas requiring subjective or complex judgments that are most important to our financial position and results of operations and, as such, are considered to be critical accounting policies. For additional information regarding critical accounting policies, refer to “Summary of Significant Accounting Policies” presented in Note 1 of “Notes to Consolidated Financial Statements” and the section titled “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations both included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2015
, as well as the section titled “Credit Quality Management and Allowance for Loan Losses” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included later in this Form 10-Q. There have been no significant changes in our application of critical accounting policies since
December 31, 2015
.