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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________________
FORM 10-Q
______________________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    .
Commission File Number 001-34066
______________________________________________ 
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter)
______________________________________________ 
Delaware
 
36-3681151
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
120 South LaSalle Street
Chicago, Illinois
 
60603
(Address of principal executive offices)
 
(zip code)
(312) 564-2000
Registrant’s telephone number, including area code
______________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
As of October 31, 2016, there were 79,684,172 shares of the issuer’s voting common stock, no par value, outstanding.

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Table of Contents

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


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Table of Contents

PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except shares and per share data)
 
September 30,
2016
 
December 31,
2015
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Cash and due from banks
$
166,607

 
$
145,147

Federal funds sold and interest-bearing deposits in banks
245,193

 
238,511

Loans held-for-sale
75,438

 
108,798

Securities available-for-sale, at fair value (pledged as collateral to creditors: $104.7 million - 2016; $100.2 million - 2015)
1,961,099

 
1,765,366

Securities held-to-maturity, at amortized cost (fair value: $1.7 billion - 2016; $1.4 billion - 2015)
1,633,235

 
1,355,283

Federal Home Loan Bank ("FHLB") stock
30,213

 
26,613

Loans – excluding covered assets, net of unearned fees
14,654,570

 
13,266,475

Allowance for loan losses
(180,268
)
 
(160,736
)
Loans, net of allowance for loan losses and unearned fees
14,474,302

 
13,105,739

Covered assets
23,889

 
26,954

Allowance for covered loan losses
(4,879
)
 
(5,712
)
Covered assets, net of allowance for covered loan losses
19,010

 
21,242

Other real estate owned, excluding covered assets
12,035

 
7,273

Premises, furniture, and equipment, net
44,760

 
42,405

Accrued interest receivable
48,512

 
45,482

Investment in bank owned life insurance
57,750

 
56,653

Goodwill
94,041

 
94,041

Other intangible assets
1,809

 
3,430

Derivative assets
62,094

 
40,615

Other assets 
179,462

 
196,250

Total assets 
$
19,105,560

 
$
17,252,848

Liabilities
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
4,857,470

 
$
4,355,700

Interest-bearing
10,631,384

 
9,989,892

Total deposits
15,488,854

 
14,345,592

Short-term borrowings
1,233,318

 
372,467

Long-term debt
338,286

 
688,215

Accrued interest payable
7,953

 
7,080

Derivative liabilities
19,236

 
18,229

Other liabilities
135,559

 
122,314

Total liabilities 
17,223,206

 
15,553,897

Equity
 
 
 
Common stock (no par value, $1 stated value; authorized shares: 174 million; issued shares: 79,640,004 - 2016 and 79,099,157 - 2015)
79,101

 
78,439

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

 
(103
)
Additional paid-in capital
1,091,275

 
1,071,674

Retained earnings
678,059

 
531,682

Accumulated other comprehensive income, net of tax
33,919

 
17,259

Total equity
1,882,354

 
1,698,951

Total liabilities and equity 
$
19,105,560

 
$
17,252,848

See accompanying notes to consolidated financial statements.

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PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Interest Income
 
 
 
 
 
 
 
Loans, including fees
$
148,759

 
$
132,106

 
$
432,990

 
$
380,455

Federal funds sold and interest-bearing deposits in banks
380

 
168

 
1,055

 
674

Securities:
 
 
 
 
 
 
 
Taxable
15,283

 
13,599

 
45,651

 
40,696

Exempt from Federal income taxes
2,322

 
2,177

 
6,951

 
5,964

Other interest income
139

 
69

 
459

 
180

Total interest income
166,883

 
148,119

 
487,106

 
427,969

Interest Expense
 
 
 
 
 
 
 
Deposits
15,238

 
11,838

 
42,274

 
34,742

Short-term borrowings
1,070

 
24

 
2,295

 
455

Long-term debt
5,065

 
5,048

 
15,492

 
14,948

Total interest expense
21,373

 
16,910

 
60,061

 
50,145

Net interest income
145,510

 
131,209

 
427,045

 
377,824

Provision for loan and covered loan losses
15,691

 
4,197

 
27,662

 
11,959

Net interest income after provision for loan and covered loan losses
129,819

 
127,012

 
399,383

 
365,865

Non-interest Income
 
 
 
 
 
 
 
Asset management
5,590

 
4,462

 
15,854

 
13,566

Mortgage banking
5,060

 
3,340

 
12,636

 
11,267

Capital markets products
5,448

 
3,098

 
16,499

 
12,189

Treasury management
8,617

 
8,010

 
25,093

 
22,758

Loan, letter of credit and commitment fees
5,293

 
5,670

 
16,031

 
15,690

Syndication fees
4,721

 
4,364

 
15,819

 
12,361

Deposit service charges and fees and other income
2,885

 
1,585

 
5,303

 
8,740

Net securities gains

 
260

 
1,111

 
793

Total non-interest income
37,614

 
30,789

 
108,346

 
97,364

Non-interest Expense
 
 
 
 
 
 
 
Salaries and employee benefits
55,889

 
50,019

 
169,554

 
152,400

Net occupancy and equipment expense
7,099

 
7,098

 
21,326

 
21,087

Technology and related costs
6,282

 
4,665

 
17,062

 
13,540

Marketing
4,587

 
3,682

 
12,916

 
11,926

Professional services
2,865

 
3,679

 
15,349

 
8,574

Outsourced servicing costs
1,379

 
1,786

 
5,271

 
5,500

Net foreclosed property expenses
965

 
1,080

 
1,891

 
2,993

Postage, telephone, and delivery
818

 
857

 
2,603

 
2,618

Insurance
3,931

 
3,667

 
11,730

 
10,328

Loan and collection expense
1,972

 
2,324

 
5,521

 
6,802

Other expenses
6,133

 
6,318

 
13,406

 
14,449

Total non-interest expense
91,920

 
85,175

 
276,629

 
250,217

Income before income taxes
75,513

 
72,626

 
231,100

 
213,012

Income tax provision
26,621

 
27,358

 
82,291

 
79,838

Net income available to common stockholders
$
48,892

 
$
45,268

 
$
148,809

 
$
133,174

Per Common Share Data
 
 
 
 
 
 
 
Basic earnings per share
$
0.61

 
$
0.58

 
$
1.87

 
$
1.70

Diluted earnings per share
$
0.60

 
$
0.57

 
$
1.84

 
$
1.67

Cash dividends declared
$
0.01

 
$
0.01

 
$
0.03

 
$
0.03

Weighted-average common shares outstanding
79,007

 
78,144

 
78,803

 
77,834

Weighted-average diluted common shares outstanding
80,673

 
79,401

 
80,283

 
79,027

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

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PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited) 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
48,892

 
$
45,268

 
$
148,809

 
$
133,174

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Net unrealized (losses) gains
(7,303
)
 
9,264

 
21,526

 
3,857

Reclassification of net gains included in net income

 
(385
)
 
(1,111
)
 
(918
)
Income tax benefit (expense)
2,854

 
(3,461
)
 
(7,759
)
 
(1,180
)
Net unrealized (losses) gains on available-for-sale securities
(4,449
)
 
5,418

 
12,656

 
1,759

Cash flow hedges:
 
 
 
 
 
 
 
Net unrealized (losses) gains
(1,131
)
 
10,261

 
12,262

 
18,387

Reclassification of net gains included in net income
(1,661
)
 
(2,571
)
 
(5,752
)
 
(7,643
)
Income tax benefit (expense)
1,077

 
(2,987
)
 
(2,506
)
 
(4,171
)
Net unrealized (losses) gains on cash flow hedges
(1,715
)
 
4,703

 
4,004

 
6,573

Other comprehensive (loss) income
(6,164
)
 
10,121

 
16,660

 
8,332

Comprehensive income
$
42,728

 
$
55,389

 
$
165,469

 
$
141,506

See accompanying notes to consolidated financial statements.

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

 
 
$
77,211

 
$
(53
)
 
$
1,034,048

 
$
349,556

 
$
20,917

 
$
1,481,679

Comprehensive income (loss) (1)

 
 

 

 

 
133,174

 
8,332

 
141,506

Cash dividends declared ($0.03 per common share)

 
 

 

 

 
(2,388
)
 

 
(2,388
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonvested (restricted) stock grants
251

 
 

 

 

 

 

 

Exercise of stock options
598

 
 
428

 
5,903

 
8,209

 

 

 
14,540

Restricted stock activity
6

 
 
558

 

 
(558
)
 

 

 

Deferred compensation plan
1

 
 

 
29

 
276

 

 

 
305

Excess tax benefit from share-based compensation plans

 
 

 

 
4,331

 

 

 
4,331

Stock repurchased in connection with benefit plans
(171
)
 
 

 
(5,942
)
 

 

 

 
(5,942
)
Share-based compensation expense

 
 

 

 
13,968

 

 

 
13,968

Balance at September 30, 2015
78,863

 
 
$
78,197

 
$
(63
)
 
$
1,060,274

 
$
480,342

 
$
29,249

 
$
1,647,999

Balance at January 1, 2016
79,097

 
 
$
78,439

 
$
(103
)
 
$
1,071,674

 
$
531,682

 
$
17,259

 
$
1,698,951

Comprehensive income (1)

 
 

 

 

 
148,809

 
16,660

 
165,469

Cash dividends declared ($0.03 per common share)

 
 

 

 

 
(2,432
)
 

 
(2,432
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonvested (restricted) stock grants
266

 
 

 

 

 

 

 

Exercise of stock options
364

 
 
247

 
4,251

 
4,373

 

 

 
8,871

Restricted stock activity
38

 
 
412

 
464

 
(876
)
 

 

 

Deferred compensation plan
5

 
 
3

 
81

 
425

 

 

 
509

Stock repurchased in connection with benefit plans
(129
)
 
 

 
(4,693
)
 
(24
)
 

 

 
(4,717
)
Share-based compensation expense

 
 

 

 
15,703

 

 

 
15,703

Balance at September 30, 2016
79,641

 
 
$
79,101

 
$

 
$
1,091,275

 
$
678,059

 
$
33,919

 
$
1,882,354

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

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PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2016
 
2015
Operating Activities
 
 
 
Net income
$
148,809

 
$
133,174

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Provision for loan and covered loan losses
27,662

 
11,959

Provision for unfunded commitments
3,888

 
2,931

Depreciation and impairment of premises, furniture, and equipment
6,765

 
6,361

Net amortization of premium on securities
17,196

 
13,201

Net securities gains
(1,111
)
 
(793
)
Valuation adjustments on other real estate owned
1,371

 
2,254

Net losses on sale of other real estate owned
357

 
399

Net (accretion) amortization of discount on covered assets
(51
)
 
282

Bank owned life insurance income
(1,097
)
 
(1,085
)
Net increase (decrease) in deferred loan fees and unamortized discounts and premiums on loans
5,092

 
(3,687
)
Share-based compensation expense
15,703

 
13,968

Excess tax benefit from exercise of stock options and vesting of restricted shares
(2,841
)
 
(4,876
)
Provision for deferred income tax benefit
(11,329
)
 
(3,290
)
Amortization of other intangibles
1,621

 
1,877

Originations and purchases of loans held-for-sale
(449,120
)
 
(467,177
)
Proceeds from sales of loans held-for-sale
495,302

 
515,810

Net gains from sales of loans held-for-sale
(13,107
)
 
(9,605
)
Gain on sale of branch

 
(4,092
)
Net increase in derivative assets and liabilities
(20,472
)
 
(21,716
)
Net increase in accrued interest receivable
(3,030
)
 
(2,533
)
Net increase (decrease) in accrued interest payable
873

 
(439
)
Net decrease in other assets
24,647

 
43,221

Net increase in other liabilities
12,231

 
13,982

Net cash provided by operating activities
259,359

 
240,126

Investing Activities
 
 
 
Available-for-sale securities:
 
 
 
Proceeds from maturities, prepayments, and calls
155,753

 
159,121

Proceeds from sales
45,446

 
57,313

Purchases
(385,037
)
 
(279,675
)
Held-to-maturity securities:
 
 
 
Proceeds from maturities, prepayments, and calls
155,086

 
119,597

Purchases
(440,603
)
 
(288,555
)
Net purchase of FHLB stock
(3,600
)
 
(2,074
)
Net increase in loans
(1,411,659
)
 
(1,189,890
)
Net decrease in covered assets
2,502

 
6,228

Proceeds from sale of other real estate owned
3,633

 
7,105

Net purchases of premises, furniture, and equipment
(9,120
)
 
(5,483
)
Net cash used in investing activities
(1,887,599
)
 
(1,416,313
)
Financing Activities
 
 
 
Net increase in deposit accounts
1,143,262

 
685,555

Net increase in short-term borrowings, excluding FHLB advances
851

 
57,736

Net increase in FHLB advances
510,000

 
374,000

Stock repurchased in connection with benefit plans
(4,717
)
 
(5,942
)
Cash dividends paid
(2,394
)
 
(2,358
)
Proceeds from exercise of stock options and issuance of common stock under benefit plans
9,380

 
14,845

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

 
4,876

Net cash provided by financing activities
1,656,382

 
1,128,712

Net increase (decrease) in cash and cash equivalents
28,142

 
(47,475
)
Cash and cash equivalents at beginning of year
383,658

 
424,552

Cash and cash equivalents at end of period
$
411,800

 
$
377,077

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

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PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Amounts in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2016
 
2015
Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
59,188

 
$
50,584

Cash paid for income taxes
88,992

 
76,997

Non-cash transfers of loans to loans held-for-sale
82,591

 
110,529

Non-cash transfers of loans to other real estate
10,123

 
5,102

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

PrivateBancorp, Inc. (“PrivateBancorp” or the “Company”), a Delaware corporation incorporated in 1989, is a Chicago-based bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company is the holding company for The PrivateBank and Trust Company (“PrivateBank” or the “Bank”), an Illinois-chartered bank founded in Chicago in 1991. Through the Bank, we provide customized business and personal financial services to middle market companies, as well as business owners, executives, entrepreneurs and families in the markets and communities we serve.

On June 29, 2016, the Company entered into a definitive merger agreement with Canadian Imperial Bank of Commerce (“CIBC”), a Canadian chartered bank, and CIBC Holdco Inc. (“Holdco”), a Delaware corporation and a direct, wholly owned subsidiary of CIBC, pursuant to which the Company will merge with and into Holdco, with Holdco surviving the merger. Following the merger, the Bank will be headquartered in Chicago, Illinois, retain its Illinois state banking charter and be an indirect, wholly owned subsidiary of CIBC. The transaction is expected to close by the end of the first quarter 2017, pending regulatory and stockholder approval and other customary closing conditions.

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

Additional information about the definitive agreement is set forth in the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission (“SEC”) on July 6, 2016.

Direct costs related to the proposed transaction were expensed as incurred and totaled $6.4 million for the nine months ended September 30, 2016. These costs were primarily comprised of financial advisor and other professional services fees.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

In preparing the consolidated financial statements, we have considered the impact of events occurring subsequent to September 30, 2016, for potential recognition or disclosure.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period - On January 1, 2016, we adopted new accounting guidance issued by the Financial Accounting

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Standards Board (“FASB”) that clarifies the accounting for a performance target that affects vesting of a share-based payment award and that could be achieved after the requisite service period. The guidance indicates that such a performance target would not be reflected in the estimation of the award’s grant date fair value. Rather, compensation cost for such an award would be recognized over the requisite service period, if it is probable that the performance target will be achieved. The total amount of compensation cost recognized during and after the requisite service period would reflect the number of awards that are expected to vest and would be adjusted to reflect those awards that ultimately vest. The guidance is applied prospectively to awards that are granted or modified after the effective date. The adoption of this guidance did not impact our consolidated financial position or consolidated results of operations.

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

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

Improvements to Employee Share-Based Payment Accounting - In March 2016, the FASB issued guidance that amends certain aspects of share-based payment accounting. The new guidance (1) requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, and eliminates the accounting for additional paid-in-capital pools; (2) allows the Company to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting; (3) requires the Company to make an accounting policy election to either recognize forfeitures as they occur or estimate the number of awards expected to be forfeited; (4) requires the Company to present excess tax benefits as an operating activity on the statement of cash flows; and (5) clarifies that the Company must classify cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Regarding the accounting policy election related to the accounting for forfeitures, the Company has elected to estimate the number of awards expected to be forfeited, consistent with our past practice of estimating forfeitures. As permitted under the new guidance, the Company has elected to early adopt the guidance for the Company’s financial statements that include periods beginning on January 1, 2016. The Company has applied the guidance related to items (1) and (4) prospectively; the guidance related to item (5) retrospectively; and the guidance related to items (2) and (3) using a modified retrospective transition method with a cumulative-effect adjustment to retained earnings. For the nine months ended September 30, 2016, the Company recognized a $2.8 million tax benefit in the consolidated statements of income within the income tax provision, representing the prospective application of the accounting change described in (1) above. Adoption of all other changes did not have an impact on our consolidated financial position or consolidated results of operations.

Accounting Pronouncements Pending Adoption

Revenue from Contracts with Customers - In May 2014, August 2015, March 2016, April 2016 and May 2016, the FASB issued new revenue recognition guidance that will replace most of the existing revenue recognition guidance in U.S. GAAP. All arrangements involving the transfer of goods or services to customers are within the scope of the guidance, except for certain contracts subject to other U.S. GAAP guidance, including lease contracts and rights and obligations related to financial instruments. The standard’s core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also includes new disclosure requirements related to the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for the Company’s financial statements beginning January 1, 2018. The guidance allows an entity to apply the new standard either retrospectively or through a cumulative-effect adjustment as of January 1, 2018. We have elected to implement this new accounting guidance using a cumulative-effect adjustment. This guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP guidance. For that reason, we do not expect it to have a material impact on our consolidated results of operations for elements of the statement of income associated with financial instruments, including securities gains, interest income and interest

10

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expense. The Company is continuing to evaluate the effect of the new guidance on revenue sources other than financial instruments on our financial position and consolidated results of operations.

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

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

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

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

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


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3. SECURITIES

Securities Portfolio
(Amounts in thousands)

 
September 30, 2016
 
December 31, 2015
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
 
 
Gains
 
Losses
 
 
 
Gains
 
Losses
 
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
473,754

 
$
3,938

 
$
(91
)
 
$
477,601

 
$
322,922

 
$
30

 
$
(1,301
)
 
$
321,651

U.S. Agencies
46,159

 
397

 

 
46,556

 
46,504

 

 
(406
)
 
46,098

Collateralized mortgage obligations
79,157

 
3,108

 

 
82,265

 
97,260

 
2,784

 
(72
)
 
99,972

Residential mortgage-backed securities
856,874

 
22,228

 
(139
)
 
878,963

 
817,006

 
15,870

 
(3,021
)
 
829,855

State and municipal securities
461,468

 
14,406

 
(160
)
 
475,714

 
458,402

 
9,779

 
(391
)
 
467,790

Total
$
1,917,412

 
$
44,077

 
$
(390
)
 
$
1,961,099

 
$
1,742,094

 
$
28,463

 
$
(5,191
)
 
$
1,765,366

Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
$
43,516

 
$

 
$
(406
)
 
$
43,110

 
$
50,708

 
$

 
$
(1,729
)
 
$
48,979

Residential mortgage-backed securities
1,307,065

 
22,880

 
(83
)
 
1,329,862

 
1,069,746

 
4,809

 
(4,983
)
 
1,069,572

Commercial mortgage-backed securities
278,095

 
6,241

 
(98
)
 
284,238

 
229,722

 
499

 
(2,158
)
 
228,063

State and municipal securities
254

 
1

 

 
255

 
254

 

 

 
254

Foreign sovereign debt
500

 

 

 
500

 
500

 

 

 
500

Other securities
3,805

 

 
(46
)
 
3,759

 
4,353

 

 
(480
)
 
3,873

Total
$
1,633,235

 
$
29,122

 
$
(633
)
 
$
1,661,724

 
$
1,355,283

 
$
5,308

 
$
(9,350
)
 
$
1,351,241


The carrying value of securities pledged to secure public deposits, FHLB advances, trust deposits, Federal Reserve Bank (“FRB”) discount window borrowing availability, derivative transactions, and standby letters of credit with counterparty banks and for other purposes as permitted or required by law totaled $400.0 million and $421.9 million at September 30, 2016 and December 31, 2015, respectively. Of total pledged securities, securities pledged to creditors under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties totaled $104.7 million and $100.2 million at September 30, 2016 and December 31, 2015, respectively.

Excluding securities issued or backed by the U.S. Government, its agencies and U.S. Government-sponsored enterprises, there were no investments in securities from one issuer that exceeded 10% of consolidated equity at September 30, 2016 or December 31, 2015.


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The following table presents the fair values of securities with unrealized losses as of September 30, 2016 and December 31, 2015. The securities presented are grouped according to the time periods during which the securities have been in a continuous unrealized loss position.

Securities in Unrealized Loss Position
(Amounts in thousands)
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Number of Securities
 
Fair
Value
 
Unrealized
Losses
 
Number of Securities
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
As of September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
2

 
$
50,954

 
$
(91
)
 

 
$

 
$

 
$
50,954

 
$
(91
)
Residential mortgage-backed securities
5

 
59,674

 
(139
)
 

 

 

 
59,674

 
(139
)
State and municipal securities
60

 
29,775

 
(155
)
 
2

 
843

 
(5
)
 
30,618

 
(160
)
Total

 
$
140,403

 
$
(385
)
 


 
$
843

 
$
(5
)
 
$
141,246

 
$
(390
)
Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations
1

 
$
10,565

 
$
(13
)
 
3

 
$
32,545

 
$
(393
)
 
$
43,110

 
$
(406
)
Residential mortgage-backed securities
1

 
20,614

 
(1
)
 
4

 
13,923

 
(82
)
 
34,537

 
(83
)
Commercial mortgage-backed securities
9

 
22,255

 
(70
)
 
1

 
3,544

 
(28
)
 
25,799

 
(98
)
Other securities
1

 
3,759

 
(46
)
 

 

 

 
3,759

 
(46
)
Total

 
$
57,193

 
$
(130
)
 

 
$
50,012

 
$
(503
)
 
$
107,205

 
$
(633
)
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
11

 
$
271,006

 
$
(1,081
)
 
1

 
$
25,773

 
$
(220
)
 
$
296,779

 
$
(1,301
)
U.S. Agencies
3

 
46,098

 
(406
)
 

 

 

 
46,098

 
(406
)
Collateralized mortgage obligations
6

 
7,528

 
(72
)
 

 

 

 
7,528

 
(72
)
Residential mortgage-backed securities
28

 
243,862

 
(1,148
)
 
5

 
75,533

 
(1,873
)
 
319,395

 
(3,021
)
State and municipal securities
95

 
48,974

 
(353
)
 
12

 
3,485

 
(38
)
 
52,459

 
(391
)
Total

 
$
617,468

 
$
(3,060
)
 


 
$
104,791

 
$
(2,131
)
 
$
722,259

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

 
$

 
$

 
4

 
$
48,979

 
$
(1,729
)
 
$
48,979

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

 
512,395

 
(3,680
)
 
10

 
57,340

 
(1,303
)
 
569,735

 
(4,983
)
Commercial mortgage-backed securities
35

 
128,434

 
(1,502
)
 
12

 
37,350

 
(656
)
 
165,784

 
(2,158
)
Other securities
1

 
3,873

 
(480
)
 

 

 

 
3,873

 
(480
)
Total

 
$
644,702

 
$
(5,662
)
 

 
$
143,669

 
$
(3,688
)
 
$
788,371

 
$
(9,350
)

There were $50.9 million of securities with $508,000 in an unrealized loss position for greater than 12 months at September 30, 2016. At December 31, 2015, there were $248.5 million of securities with $5.8 million in an unrealized loss position for greater than 12 months. The Company does not consider these unrealized losses to be credit-related. These unrealized losses relate to changes in interest rates and market spreads. We do not intend to sell the securities and we do not believe it is more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.


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Table of Contents

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

The following table presents the remaining contractual maturity of securities as of September 30, 2016, by amortized cost and fair value.

Remaining Contractual Maturity of Securities
(Amounts in thousands)

 
September 30, 2016
 
Available-for-Sale
 
Held-To-Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
U.S. Treasury, U.S. Agencies, state and municipal and foreign sovereign debt and other securities:
 
 
 
 
 
 
 
One year or less
$
47,317

 
$
47,472

 
$
132

 
$
132

One year to five years
529,926

 
537,239

 
622

 
623

Five years to ten years
361,125

 
371,113

 
3,805

 
3,759

After ten years
43,013

 
44,047

 

 

All other securities:
 
 
 
 
 
 
 
Collateralized mortgage obligations
79,157

 
82,265

 
43,516

 
43,110

Residential mortgage-backed securities
856,874

 
878,963

 
1,307,065

 
1,329,862

Commercial mortgage-backed securities

 

 
278,095

 
284,238

Total
$
1,917,412

 
$
1,961,099

 
$
1,633,235

 
$
1,661,724


The following table presents gains on securities for the three months and nine months ended September 30, 2016 and 2015.

Securities Gains (Losses)
(Amounts in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Proceeds from sales
$

 
$
26,967

 
$
45,446

 
$
57,313

Gross realized gains
$

 
$
385

 
$
1,133

 
$
942

Gross realized losses

 
(125
)
 
(22
)
 
(149
)
Net realized gains
$

 
$
260

 
$
1,111

 
$
793

Income tax provision on net realized gains
$

 
$
98

 
$
428

 
$
308


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

All non-marketable Community Reinvestment Act (“CRA”) qualified investments, totaling $50.9 million and $54.2 million at September 30, 2016 and December 31, 2015, respectively, are recorded in other assets on the consolidated statements of financial condition.


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Table of Contents

4. LOANS AND CREDIT QUALITY

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

Loan Portfolio
(Amounts in thousands)
 
 
September 30,
2016
 
December 31,
2015
Commercial and industrial
$
7,446,754

 
$
6,747,389

Commercial - owner-occupied commercial real estate
2,062,614

 
1,888,238

Total commercial
9,509,368

 
8,635,627

Commercial real estate
2,946,687

 
2,629,873

Commercial real estate - multi-family
883,850

 
722,637

Total commercial real estate
3,830,537

 
3,352,510

Construction
496,773

 
522,263

Residential real estate
525,836

 
461,412

Home equity
124,367

 
129,317

Personal
167,689

 
165,346

Total loans
$
14,654,570

 
$
13,266,475

Net deferred loan fees and unamortized discount and premium on loans, included as a reduction in total loans
$
42,917

 
$
48,009

Overdrawn demand deposits included in total loans
$
1,934

 
$
2,654


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

Loans Held-for-Sale
(Amounts in thousands)

 
September 30,
2016
 
December 31,
2015
Mortgage loans held-for-sale (1)
$
28,492

 
$
35,704

Other loans held-for-sale (2)
46,946

 
73,094

Total loans held-for-sale
$
75,438

 
$
108,798

(1) 
Comprised of residential mortgage loan originations intended to be sold in the secondary market. The Company accounts for these loans under the fair value option. Refer to Note 17 for additional information regarding mortgage loans held-for-sale.
(2) 
Amounts represent commercial, commercial real estate, construction and residential loans carried at the lower of aggregate cost or fair value, including one nonaccrual loan totaling $205,000 and $667,000 at September 30, 2016 and December 31, 2015, respectively. Generally, the Company intends to sell these loans within 30-60 days from the date the intent to sell was established.


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Table of Contents

Carrying Value of Loans Pledged
(Amounts in thousands)
 
 
September 30,
2016
 
December 31,
2015
Loans pledged to secure outstanding borrowings or availability:
 
 
 
FRB discount window borrowings (1)
$
501,112

 
$
440,023

FHLB advances (2)
3,868,584

 
4,133,942

Total
$
4,369,696

 
$
4,573,965

(1) 
No borrowings were outstanding at September 30, 2016 and December 31, 2015.
(2) 
Refer to Notes 8 and 9 for additional information regarding FHLB advances.

Loan Portfolio Aging
(Amounts in thousands)

 
 
 
Delinquent
 
 
 
 
 
 
 
Current
 
30 – 59
Days Past Due
 
60 – 89
Days Past Due
 
90 Days Past
Due and
Accruing
 
Total
Accruing
Loans
 
Nonaccrual
 
Total Loans
As of September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
9,432,850

 
$
1,683

 
$
2,558

 
$

 
$
9,437,091

 
$
72,277

 
$
9,509,368

Commercial real estate
3,824,530

 

 

 

 
3,824,530

 
6,007

 
3,830,537

Construction
496,773

 

 

 

 
496,773

 

 
496,773

Residential real estate
521,149

 

 
563

 

 
521,712

 
4,124

 
525,836

Home equity
118,891

 
528

 

 

 
119,419

 
4,948

 
124,367

Personal
167,631

 
31

 
11

 

 
167,673

 
16

 
167,689

Total loans
$
14,561,824

 
$
2,242

 
$
3,132

 
$

 
$
14,567,198

 
$
87,372

 
$
14,654,570

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

 
$
6,641

 
$
1,042

 
$

 
$
8,602,833

 
$
32,794

 
$
8,635,627

Commercial real estate
3,343,714

 

 
295

 

 
3,344,009

 
8,501

 
3,352,510

Construction
522,263

 

 

 

 
522,263

 

 
522,263

Residential real estate
455,764

 
613

 
273

 

 
456,650

 
4,762

 
461,412

Home equity
121,580

 
66

 

 

 
121,646

 
7,671

 
129,317

Personal
165,188

 
132

 
5

 

 
165,325

 
21

 
165,346

Total loans
$
13,203,659

 
$
7,452

 
$
1,615

 
$

 
$
13,212,726

 
$
53,749

 
$
13,266,475


Impaired Loans

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


16

Table of Contents

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

Impaired Loans
(Amounts in thousands)

 
Unpaid
Contractual
Principal
Balance
 
Recorded
Investment
With No
Specific
Reserve
 
Recorded
Investment
With
Specific
Reserve
 
Total
Recorded
Investment
 
Specific
Reserve
As of September 30, 2016
 
 
 
 
 
 
 
 
 
Commercial
$
142,021

 
$
65,423

 
$
68,618

 
$
134,041

 
$
10,870

Commercial real estate
6,007

 
2,247

 
3,760

 
6,007

 
318

Residential real estate
4,240

 

 
4,124

 
4,124

 
287

Home equity
7,581

 
3,073

 
4,376

 
7,449

 
386

Personal
16

 

 
16

 
16

 
1

Total impaired loans
$
159,865

 
$
70,743

 
$
80,894

 
$
151,637

 
$
11,862

As of December 31, 2015
 
 
 
 
 
 
 
 
 
Commercial
$
49,912

 
$
27,300

 
$
20,020

 
$
47,320

 
$
4,458

Commercial real estate
14,150

 
2,085

 
6,416

 
8,501

 
1,156

Residential real estate
4,950

 

 
4,762

 
4,762

 
539

Home equity
10,071

 
2,626

 
7,065

 
9,691

 
1,106

Personal
21

 

 
21

 
21

 
3

Total impaired loans
$
79,104

 
$
32,011

 
$
38,284

 
$
70,295

 
$
7,262


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

 
2016
 
2015
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Three Months Ended September 30
 
 
 
 
 
 
 
Commercial
$
104,005

 
$
895

 
$
53,886

 
$
287

Commercial real estate
11,506

 

 
12,656

 

Construction
107

 

 

 

Residential real estate
4,094

 

 
4,332

 

Home equity
7,573

 
32

 
11,942

 
34

Personal
14

 

 
25

 

Total
$
127,299

 
$
927

 
$
82,841

 
$
321

Nine Months Ended September 30
 
 
 
 
 
 
 
Commercial
$
76,793